Below is a guest post by Jennifer Gorton. She wanted to offer tips and tricks upon entering the Forex market. Youngandthrifty personally doesn’t trade the Forex market, but can see the advantages of including it in your portfolio (you can trade 24-7!)– but at the same time, Forex is considered more high risk.
If your savings accounts are not earning you enough interest you also don’t want to lock your money up in a certificate of deposit, maybe trying to trade the Forex market is for you. With many brokers to choose from, it is relatively easy to set up a trading account with a Forex broker. To make it even easier to start trading, most of these brokers only require a small deposit of $50.00 to $100.00 to open an account. Although, do keep in mind that once you fund your account you do not need to start trading with live money from the start. Forex brokers will offer free demo accounts to all customers. These demo accounts will allow you to get a feel for how the currency markets move on a daily basis. The trader can then try out trading strategies without putting their real money at risk. For some people the learning curve will be short and for other it might take a few months to learn how to make profits. The demo account will be available for as long as you need it and there is never a time when the broker will require you to trade with real money.
Trading Forex, like any other market ( editor’s note: be it the stock market, real estate market, or even the farmer’s market- okay maybe not the farmer’s market), revolves around the same concept of buying when you believe there will be appreciation and selling when the asset will depreciate. The reasons why one currency will move up while another moves down vary and if you are serious about learning to trade the Forex market, you need to be sure you watch or read all the financial news that is out there. In many instances, the currency markets will move on news releases and stories from the press. There are many cable news channels and web sites that will provide you enough insight into the currency markets to help you trade. Being on top of the financial news of the day will give you an idea of what directions the currencies are moving in.
The currency markets have been a hot topic in the all these news channels for the past few months. At the moment, there are some financial and political issues in Europe which are making the currencies more volatile now than at the beginning of the year. This is a good reason to open an account and start practicing with the demo software. The volatility creates more opportunities for you to make money; however like all things, this volatility will not last forever so traders need to capitalize on this opportunity now. The demo software that is offered has the same free Forex indicators that the real money software has. These technical indicators will help you predict future price movement of the currency you are trading. Technical Indicators stem from technical analysis, which is a major tool used in trading the foreign exchange markets. It would be in your best interest to learn the various Forex indicators that market professionals look at. There are many books and many web pages that will educate the trader about the use of technical indicators for trading the Forex market.
If there was ever a good saying that would help anyone trade the Forex market, it would be: practice, practice, practice. Keep most of your money in your savings account, even if it is earning a dismal return. The small initial deposit will give you enough cash to learn how to trade at first. If after a few months you feel more comfortable with your trading results, then it might be beneficial to add more money to the Forex trading account. The use of leverage that brokers will give clients will give the customer the power to buy more than their account balance. Be sure that if you start a new account you understand how leverage works (editors note: and don’t go borrowing money from the brokers that you can’t pay back- or else you’ll get into t-r-o-u-b-l-e).
My recommendation to new traders is that they start trading the smallest lots the broker will allow them to trade. This will keep their profit or loss at a relatively low level that they can handle. With most small lots, the price movement in the currency equates to a dollar gain or loss and it depends on what currency pair you decide to trade. The new trader should also stick with the most popular currency pairs. These include the EUR/USD, USD/JPY, and the GBP/USD. These pairs are easier for beginners to trade because there is more volume associated with them. The higher volume equates to a tighter spread, giving the trader a higher probability of making money. Then, once you feel as if you can handle more risk, you should slowly scale up your position size. The most important thing to remember is to never buy more than what you feel comfortable with…you have to think of the worst case scenario that can happen, and plan around that. Using stop limit orders will prevent the account from losing all its value and you being out of the game. Do make sure to squeeze in a little time to practice. Fortunately, the Forex market is open 24/7 five days a week so even if you have a full time day job you can practice and trade during the evening and night hours.
That’s all for the tips and hints that I have to get started in the Foreign Exchange market! Good luck and happy trading.