Forex is the world currency market. You can quickly and easily buy and sell all the coins in the world. It is a very flexible reality, it can be a hobby, a method to increase earnings or a real job. The chances of gains (and losses) are many and very rapid as it is the most liquid market on the planet and is open 24 hours a day from Sunday evening to Friday evening. Let's see together how to approach this world.
Steps
Method 1 of 3: Forex Online The Basics
Step 1. Learn basic terminology
- In forex, the operations you will perform will always be related to a currency pair such as EUR / USD, and will involve the purchase or sale of the currency in the numerator (base currency) and the consequent sale or purchase of the currency in the denominator (quoted currency).
- The price indicates how much the exchange rate between the currency pair is quoted and more precisely how much quoted currency you have to spend to buy the base currency. Let's take an example: you want to buy US dollars using British pounds, so you are referring to the price indicated by the GBP / USD exchange rate which is 1, 589. In this case, the exchange indicates that with 1 pound you can buy 1, 589 US dollars.
- 'Long' position: indicates that you want to buy the base currency and sell the quoted currency accordingly. In our example, you are selling US dollars and buying British pounds.
- 'Short' position: indicates the exact opposite, you sell the base currency that is British pounds and you buy the quoted currency, the US dollars.
- 'Bid' Price: This is the price at which your broker allows you to buy the base currency in exchange for selling the quoted currency, and is the best price available to you at that precise moment.
- 'Ask' price: it is the price to sell the base currency in exchange for buying the quoted currency.
- The 'Spread': it is the small difference that exists between the Bid price and the Ask price and corresponds to the commission you pay your broker to act as an intermediary on the currency market.
Step 2. Read the price:
You will always see two prices against a currency pair, usually the ask on the left and the bid on the right.
Step 3. First decide and choose the exchange on which you want to operate and then if you want to buy or sell
- Make a decision based on the economic situation. If you think the US economy will continue to stall or weaken, the US dollar will likely suffer as a result so you may want to sell it to buy a currency from a state whose economy is thriving.
- Follow the possible open positions of a state. If a nation has a very strong export demand for commodities or commodities, this is likely to give a boost to the growth of that nation's economy and consequently to the quotation of its currency.
- Also consider the political aspects. If in election time the winner has a good economic program for the nation or if the government eases the tax burden to get the economy going again, this is definitely a good sign for that country's currency.
- Read the economic reports. Keep up to date on some macro economic data, such as the gross domestic product of a nation, unemployment, inflation, consumption of primary goods, etc. These are all data that are made public on a monthly or weekly basis and that can also have a big impact on the price of a currency.
Step 4. Learn to calculate profits and losses
- The term 'pip' indicates the minimum price change that can affect a currency pair. Normally a pip is expressed as 0, 0001 in relation to the price of the exchange. Let's take an example: let's take the EUR / USD exchange rate, the price is 1.5460, it will move one 'pip' more if you see 1, 5461 or one pip less if you see 1, 5459.
- Multiply the number of pips your forex account has changed by the exchange price. This will tell you how much your account has increased or decreased in value. These operations are normally performed in real time by the software platform that the broker makes available to you to operate on the market.
Method 2 of 3: Open a forex account with a broker
Step 1. Search and compare offers from multiple brokers
Consider these factors when choosing yours:
- Choose a broker who has been in the market for at least 10 years. This indicates that the men who work within the organization know what they are doing and do it very well as well as care about their customers (i.e. you).
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Check that the broker is regulated and controlled by a national organization and that it has the necessary authorizations to operate on the foreign exchange market. Here is a list of the control bodies of the major nations:
- United states: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
- Great Britain: Financial Services Authority (FSA)
- Australia: Australian Securities and Investment Commission (ASIC)
- Switzerland: Swiss Federal Banking Commission (SFBC)
- Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
- France: Autorité des Marchés Financiers (AMF)
- Check what products the broker offers. If a particular broker gives you the opportunity to trade in stocks and commodities, it is very likely that it is solid and has large clients operating through its services.
- Read customer comments in online forums. Be very careful and try to understand if the clients of the broker you have opted for are satisfied or if they complain about some aspects. Sometimes it is the brokers themselves who make positive reviews or comments about themselves, so be very careful.
- Visit the broker's website. Check that it looks professional and fully functional, if it just looks like a decoy or if you see a message like 'We will be online soon' maybe you should turn your attention elsewhere.
- Check the costs for each transaction. Check the costs for transferring liquidity from your bank account to your broker's bank account and also if there are additional commissions in addition to the spread applied to each individual transaction.
- Focus on the essential. You are looking for a broker who offers excellent customer support, which allows for quick and easy execution of transactions, which is transparent in customer management policy and which has an excellent reputation.
Step 2. Request information on how to open an account via the website
You can choose whether to open a personal account or a managed account. In the first case you will be directly operating on the market by executing the individual transactions, while in the second you will delegate the broker to operate for you.
Step 3. Compile the documentation
You can request that the documentation be sent by e-mail or in many cases you can download it directly from the broker's website, normally in PDF format. Carefully check the costs of transferring money from your private bank account to the broker's account, you will have to deduct them from any profits.
Step 4. Activate your account
Normally after sending the documentation the broker sends you a web link to complete the account activation. Simply follow the instructions given.
Method 3 of 3: Start trading
Step 1. Analyze the market
There are different approaches to analyze the market:
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Technical Analysis:
It involves looking at the graphs of the historical price series and trying to guess, based on past events, what could happen in the future. The broker provides you with this data through its software platform, the most widespread in the industry is the Metatrader 4.
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Fundamental Analysis:
This type of approach considers the fundamental macro-economic aspects of individual nations and then predicts market trends.
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Sentiment analysis:
This approach is unscientific and very subjective. Basically it is a question of understanding the 'mood' of the market, so what the people who make up the market think and do and from here try to predict if a period of bullish or bearish market rises..
Step 2. Determine your margin
It depends on the broker, and it is a kind of insurance that you reserve, because it allows you to invest more money than the value of your account. This tool is called leverage.
- For example if you want to execute a transaction of € 100,000 and your broker requires a margin of 1%, you will need to have at least € 1,000 in your account to be able to trade using a leverage of 1: 100 (use leverage very carefully).
- Your gains or losses directly affect your forex account in real time. For this reason, a good rule of thumb is to never expose yourself to the market with more than 10% of your account value (many experts suggest lower percentages).
Step 3. Place your order
You can use different types of orders:
- Directly on the market This way your broker will execute your order at the current price indicated by the market.
- Limit Order Your order will be filled when the price reaches a specific level.
- Stop Orders They are buy or sell orders respectively at prices higher or lower than the current market price.
Step 4. Monitor your profits and losses
It is essential not to be emotional when making trades, the forex market is very volatile and consequently very fast in price changes, your profits can quickly turn into losses and vice versa. Stay focused, trust yourself and your instincts. Experience is the best teaching tool.
Advice
- Start your first steps in this world by using a demo account before activating a real account. You will be able to gradually approach the mental and decision-making processes that regulate investment choices (some experts argue that operating with a demo account is useless as it lacks all the emotional sphere of being on the market with 'real money' and therefore runs the risk of perceiving forex as a game or worse as a casino).
- Be thorough in managing your risk. Never export more than 10% of your account value. For example, if your liquidity is € 1000, never invest more than € 200 in total. You must always keep a margin to manage the moments when your positions will be at a loss. With too large a transaction you run the risk of losing all your money in a few moments (for many experts a percentage of 10% of the capital is already too high an investment).
- If your market forecast turns out to be incorrect and you don't have enough liquidity to cover your losses (aka 'Margin Call'), your broker will automatically close all open positions. Take all precautions to avoid finding yourself in this situation.
- Limit your losses, but don't be too emotional. If you opened a trade with an investment of € 200 and your losses are currently € 50, if you had limited them to less than € 50 you would have already exited the trade with a loss of capital. Choose carefully the percentage of money that you are willing to risk and that you are able to emotionally support when the losses materialize. In this way you will be able to better manage the rapid fluctuations of the forex market and perhaps be able to turn a losing position into a positive position.
- Remember that your losses take effect the moment you close the trade and exit the market. As long as your position is open the losses are only calculated.
Warnings
- The currency market is different from the stock market. For example in the stock market if you invest € 1000 in shares and they reach a value of 0, your losses amount to the € 1000 invested. In forex you can lose more than what you have decided to invest, as previously mentioned, managing risk optimally is crucial in this market.
- Statistics state that more than 90% of forex traders lose money. If you want to know the most common mistakes that are made, ask for the advice of your trusted financial agent or directly to your broker.
- Make sure your broker has a physical location and possibly has a presence in multiple countries. Avoid giving your money to institutions that can only be found on the web.
