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When building an investment portfolio, you might consider Forex as a lucrative investment.
Foreign currency prices are heavily influenced by news and short-term events, meaning prices change quickly, creating multiple trading opportunities for Forex traders.
What is Forex?
Forex trading is buying or selling one currency for another. Forex traders predict the change in the value of one country’s currency in relation to another.
Forex is quoted in terms of one currency versus another, such as the Euro versus the US dollar. A Forex trader would speculate if the first currency (the base or Euro in this case) would go up and down in comparison to the other (the quote or US dollar).
Below is a Forex for beginners trading guide to help take some of the mystery out of this profitable venture.
Trading Forex for Beginners
Unlike futures or stocks, the Forex market is not connected to a physical location or central exchange. What is futures trading? That’s for another article.
Forex trading occurs 24-hours a day through a global network of businesses, banks, and individuals, with multiple trading opportunities.
1. Open a Forex Trading Account
Individuals interested in trading Forex need to open up a trading account. Each Forex account and the services it provides differ, so it is important that you find the right one.
Leverage, or how much capital you control, commissions and fees, the pip spread that it has on foreign currency pairs you are looking to trade, and other services are all things to take into consideration.
2. Pick a Pair
Decide which currency pair you wish to trade.
There are over 65 currency pairs to choose from, so doing some research and understanding the volatility associated with currency pairs will help you decide.
There are resources to help you with Forex for beginners and remove some of the complexity associated with it.
3. Buy and Sell or Purchasing Derivatives
There are two main ways to trade in the foreign currency market. The simplest is buying and selling of currency pairs. Like buying and selling stocks, this is where you go long on one currency and short another. In this case, if the value of the pair itself changes in a favorable manner, you’re golden.
The second way is through the purchasing of derivatives. With the use derivative products, such as options and futures, you profit from changes in the value of currencies.
4. Buy or Sell Your Pairs
BUY–If you speculate that the base currency will strengthen against the quote currency, or the quote currency will weaken against the base currency, then buy. With every increase in the exchange price, your profits will rise, and vise versa.
SELL–If you believe that the base currency will weaken in value against the quote currency, or the quote currency will strengthen against the base currency, then sell. Your profits will rise with each point the exchange price falls, and vise versa.
Once a specific level is predetermined, an order is placed to automatically trade at a point in the future. A stop loss order is an instruction to close out a trace at a price that goes below the current market level. It is used to help minimize losses.
You can utilize stop and limit orders to help ensure that you lock in any profits and minimize your risk when your respective profit or loss risk targets are reached.
You can also close out a trade at a price that is better than the current market level. This is a limit order.
6. Monitor Your Order, then Close
Keep track of your order, monitoring your trades on your computer or phone app.
When you’re ready to close your trade, you simply need to do the opposite of what you did for the opening trade. If you bought a certain number of pairs, you would sell them to close, for instance.
At this point, your net open profit and loss will be realized and immediately reflected in your Forex trading account cash balance.
If you feel you still need more information about Forex trading before getting started, check out this tutorial.
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