Forex is one of the most volatile type of investment markets and one of the most exhilarating experiences in the world. Forex, in it’s nebulous form, is simply trading currencies-buying and selling, betting for and against the various currencies of nations. With great liquidity and immense margins, it is one of the most effective ways to make money in a market, and easily the quickest way to throw money away.
Still interested? Here is a simple, three-step guide on how to become a forex trader.
Step 1, understand how currencies are traded
First, you have to understand how currencies are traded. There are three critical terms to learn: “Exchange rate or quote,” “pairs,” “pips,” and “spread.” For starters, let’s look at a forex quote:
EUR/USD 1.3325 BUY / 1.3315 SELL
Each quote is composed of two parts, the pair and the rate. Pairs are the “items” traded on the markets, e.g., EUR/USD, USD/JPY, EUR/GBP. Each pair signifies two different currencies.
EUR/USD means “Dollars for Euro;” EUR/GBP, likewise, equals “Pounds for Euro.” The rate is what you can buy or sell the pair for. 1.3325 BUY means you can buy 1.3325 dollars for each euro, and 1.3315 SELL means you can sell 1.3315 dollars for each euro.
The second major term is “pip“. This word represents the basic unit of profit in forex so it’s crucial to understand it. A pip is the smallest increment of a pair. For the EUR/USD or any other pair it’s 1/10,000th. The yen is an exception, where the pip is 1/100th.
A final term: you might have noticed that the BUY/SELL rate wasn’t the same. That is called the “spread“. All forex markets of any liquidity have a spread of some sort, and oftentimes a broker will widen them slightly to make a profit. This is equivalent to a stock broker charging per-trade. So in order to be profitable, you will need to recoup the spread.
Step 2, practice
The second key to Forex trading is practice, practice, practice. Most forex brokers offer a $50,000 practice account. Set one up, and mess around-watch your money evaporate. After you have played around for a couple days, open another practice account, but this time develop or use a specific trading strategy. Pick a method and stick to it. You may or may not make money this time, but you will start to have a fuller understanding of the inner workings of the market. After a few weeks, try another strategy and get good at two or maybe three.
Step 3, start small
The third key is to start small. This is where most beginning traders lose the most money. After you have practiced for several months, take the strategy you know best and some money you can afford to lose. It is certainly best to chose a broker based on a comparison list or based on reputable reviews. Open a micro account, start really small, use a disciplined method, and begin trading. Know your own psychology and resist the temptation to be driven by greed or fear.