How to Trade in Foreign Exchange for Newbies

Currency is among the most heavily traded commodity worldwide, which also makes it the most liquid. Which means you will usually find a market for major currency pairs, which are EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/AUD and USD/CAD. For all those just beginning to trade in forex, the challenge is understanding the terminology and how to track price movements with time.

Here are some suggestions you can follow:

1 - Review the meaning of a currency pair. Currencies are traded in pairs, which is, two different currencies. The first currency is the transaction currency and the second is the payment currency. The quotation lets us know how many units of the payment currency are needed in order to buy one unit of the transaction currency.

2 - Understand how currency prices move. Suppose you want to trade EUR/USD. If the current quote for EUR/USD is 1.2400, it means that one EUR is exchanged for 1.24 US dollars. If the quote moves to 1.2410, it means the euro is becoming stronger against the dollar. However, if the quote moves to 1.2390, it means the euro is becoming weaker against the dollar.

3 - Select a broker with low spreads, a strong reputation and extensive tools. You can find as much forex brokers are there are different kinds of currency. Search for low spreads, which is the distinction between the price the currency can be sold and purchased at (also referred to as bid or ask price). Foreign exchange brokers don't charge commission and this difference is how they generate money. Choose a quality institution. Your broker must be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Commission (CFTC). Finally, look for an extensive tool-set offering. Download a few versions of forex trading software from different brokers before funding your account. Experiment with the tools and ask for a virtual trading account to test the trades.

4 - Sign up for a forex trading account. You can fund your account by way of a credit card, money order or wire. Signing up is equivalent to getting an equity account, but you will need to sign a margin agreement. The spreads are quite small on forex that it takes quite a lot of capital in order to trade profitably. It is not unusual for forex accounts to be leveraged 50 times (this is actually the same as borrowing money). When you register, take into account how much your account is margined. In case your trade suffers a loss which takes your position into negative territory, it will likely be automatically closed. Start off with no leverage and work your way up to 20 times. This will make it easier to comprehend the effect it has on your trades.