Forex Trading: Fundamental First Steps

Are you just starting out in the foreign currency trading market? It’s truly not as complicated as it seems. If you can interpret a price chart you’re half way home. In currency trading you can be profitable no matter if the market goes up or down. You can even gain if it’s moving in a range.

The forex market is the largest on earth, overshadowing all US stock markets taken together. Overall volume of forex trading now comes near $4 trillion a day. The forex is a de-centralized, over-the-counter market similar to the NASDAQ. It does not have a central place where trading is conducted as the NYSE does.

The extraordinary volume makes the forex market the most liquid on earth. This is why trades can be carried out so rapidly. For every buyer it’s easy to find someone wanting to sell. For each trader seeking to sell a buyer is readily available. This market is open 24 hours a day from Sunday evening (if you live in North America) non-stop through til Friday afternoon…about 5½ days a week.

In the past forex trading was only to be had by banks and other large financial institutions. However due to the development of the internet –and consequent improvements in information technology- in recent years an active ‘retail’ market has emerged where smaller firms and private citizens currently have access to the forex marketplace.

A distinct feature of forex trading is the leverage. This is the amount of money you must put up to control a related amount of currency. When trading stocks you can trade “on margin” where you have access to funds from your broker to buy stocks. This can give you leverage of 2:1. In forex the norm is 100:1. Some brokers offer leverage as high as 400:1. This can be a mixed blessinig. Yes, it can substantially increase your gains; it can also amplify your losses also. The Commodity Futures Trading Commission (CFTC) is now (spring 2010) considering a new rule that would decrease leverage in the forex market to 10:1.

Understanding these, and other principles, of the forex market is why it’s important to have solid preparation and some know-how before trading the forex market with your own funds. High-quality forex instruction is easily available from just about any broker. You can also find paid training from quite a lot of resources on the web. Once you have the principles mastered you should open a “paper trading “or demo account offered by most brokers. This will give you practice in what real trading is like. Paper trade until you’re both comfortable and profitable. Only then transition into trading with your own funds.

To begin paper trading you’ll need to choose a broker and become accustomed to the trading platform they offer. One platform, used by over 200 brokersis known as Meta Trader 4 – MT4. This platform is simple to learn and has countless indicators accessible. For these reasons MT4 is a good choice for many traders. Learn the principles of chart reading and how to understand different price patterns on the chart. This craft is called Technical Analysis. There are tomes of material written on this subject.

Each Forex chart is different although they represent the same price patterns. For example, on the daily forex chart, you can evaluate market trends in the past 24 hours to help you make decisions on the next 24 hours of trading. On the hourly chart, you can spot developments within the day. And, on the 15 minute chart, you get a picture of the recent short-termactivity. Using the 5 minute chart gets you closer to the action and is used for very short term trading likescalping.

These are the essentials on how to buy and sell the forex market. Always bear in mind that apart from the earning capability that is available in the Forex market, there are also sizeable downside risks that you have to pay attention to. You need to plan your trades and trade your plan. Set rules and guidelines for yourself and then follow them. Self-control is key. The psychology of trading is a matter unto itself that we will address in subsequent article.

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