As people increasingly look to generate income at home using methods they can teach themselves to use, trading forex has again come into the spotlight. Although starting to trade forex does not require much initial investment or education, becoming a successful forex trader typically takes time, education and commitment.
Read on to learn how to begin your forex trading career.
How Much Money Do You Need to Start Trading?
One of the great things about getting involved in online forex trading as a retail trader is that you can open up a live trading account with as little as $1, depending on the broker you select. You may not get very far trading currencies with that small amount, but you can at least get your feet wet and open an account with a broker to fund later as risk capital becomes available to you.
You can also generally start trading in a demo account funded solely with virtual money. This type of account does not cost anything to open, requires minimal setup time and you stand no chance of losing real money as you practice trading and learn how to use your broker’s trading platform.
If you live in the United States, then another great thing about retail forex trading is that you can legally operate as a day trader with a relatively small initial deposit. In contrast, the U.S. Securities and Exchange Commission (SEC) has a requirement for stock traders to deposit at least $25,000 in their stockbroking account to be able to day trade.
Choosing an Online Forex Broker
As a retail trader, you will generally need to open a live account with an online forex broker to start trading currencies using real money. While all online forex brokers will let you speculate on movements in currency pairs, they often differ considerably in how they allow you to do this, to what extent and what regulatory environment they operate in.
First and foremost, make sure that any broker you select will provide a safe place for you to deposit funds since you will need to do that in order to start trading. You also want them to offer the trading services you need given your particular trading style. A good place to start is to check how any broker you are considering measures up based on the following important selection criteria.
A broker’s oversight by a major regulatory agency helps assure that you will be dealt with fairly and that your margin deposit will remain safe in case of their bankruptcy. Any acceptable broker should therefore be regulated by an agency like the U.K.’s Financial Conduct Authority or the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) that both regulate forex brokers based in the U.S.
Dealing Spreads and Commissions
Most online brokers that act as market makers earn their money by widening the dealing spread shown to their clients relative to prevailing market rates, so active traders will generally want to choose a broker with the tightest spreads possible. Some brokers instead charge commissions since they allow clients direct access to the forex market’s very tight dealing spreads using their electronic communications network (ECN).
Each online forex broker will support one or more online trading platforms that consist of software you use to enter and monitor forex trades via the Internet. You will want to review any broker’s platform to make sure you can use it easily and that it meets your requirements as a trader. One especially popular third party trading platform that many online forex brokers support is called MetaTrader 4 and 5. This forex trading software is available as a free download from its developer MetaQuotes in desktop, web and mobile formats.
Most novice traders will appreciate a broker with a good customer support department. You will probably also want your broker to provide a website you can read and staff that speak your language for you to communicate comfortably. Most online brokers will let you contact them via phone, email and sometimes live chat.
Research and Educational Materials
You may appreciate good quality educational material that your broker provides. More advanced traders can use the research materials many brokers offer written by expert forex market analysts for trading ideas.
Leverage Ratios and Margin Basics
The maximum leverage ratio offered by your broker determines the largest trading position you can control with a given amount of money deposited in your trading account. For example, if you can access a leverage ratio of 50 to 1, then you can control a $50 trading position with just $1 deposited in your account.
In contrast, margin refers to the amount of money you must deposit in order to take on a leveraged position. In the above example, the $1 you deposited acted as the margin you needed to deposit in order to hold a $50 trading position in a particular currency pair.
Online forex brokers generally allow their clients to use up to a certain leverage ratio. Although the forex market is largely unregulated, some jurisdictions do limit the leverage ratio that smaller retail traders can use to help protect them from losses.
As an example of that sort of regulation in practice, U.S.-based forex traders can only access up to 50 to 1 leverage for major currency pairs and 20 to 1 for minor currency pairs. Similarly, European based retail forex traders can generally only access leverage ratios up to 30 to 1.
If you happen to reside in a jurisdiction that does not regulate retail forex trading so strictly, then you may be able to access leverage ratios of up to 1000 to 1 from brokers based outside of the aforementioned strict jurisdictions.
Although many retail forex traders like the flexibility that higher leverage ratios offer, keep in mind that along with the extra leverage comes added risk. In general, you can far more easily blow out a small trading account using high leverage ratios than using low leverage ratios.
If the funds available as margin in your forex trading account fall below an amount acceptable to your broker, then they can typically react by closing out your outstanding trading positions. Since this usually involves you taking a significant realized loss, you should review your broker’s relevant policies closely. You should also only place money you can readily afford to lose, which is known as risk capital, in your forex trading account to avoid taking uncomfortable losses.
Develop a Trading Plan
Anyone starting out as a forex trader would be well advised to avoid the mistake of not having a trading plan to guide their trading activities. Trading a market as volatile and unpredictable as the forex market without a clear plan of action could be considered a big mistake since it often leads to substantial losses.
While some people may get lucky and make money trading completely on their gut feelings, the majority of traders eventually find that their luck runs out at some point. This can take their trading account balance to zero far too quickly for most people’s taste.
In an ideal situation, a trading plan will outline your intended trading methodology in detail, including how positions should be opened and closed. If you stick to your plan in a disciplined manner, it will help you avoid the pitfall of allowing your emotions to adversely impact your forex trading activities.
Tips Before You Start Trading Forex
Before starting to trade currencies, keep in mind that many forms of trading will involve a considerable time expenditure as you monitor the market and select trading opportunities. Make sure you have that time and money available, as well as the support of your family, before participating in this financially risky endeavor.
You will also want to educate yourself about forex market analysis, develop and test a successful trading strategy, and put together the market research tools you will need to support your trading plan. Your overall trading methodology should also be written up in your trading plan and be extensively practiced and tested for profitability in a demo account before you start trading in a live account.
Finally, avoid trading in currency pairs where you do not yet understand the economic fundamentals of each currency and their issuing countries. This applies even if you plan on using a strategy based on technical analysis since the assumptions that underlie technical analysis can break down when the market needs to discount new fundamental information.
Open a Live Account to Start Trading
Now that you have hopefully prepared yourself properly to start trading currencies by obtaining market education, developing a trading plan, practicing in a demo account and selecting a suitable online broker, the time has finally arrived for you to open and fund a live account you can use to start trading currencies.
You will then want to use it wisely to build up your account balance over time by only risking a portion of your account on each trade, focusing on trading the most liquid currency pairs, cutting losses in a disciplined manner and allowing profits to come to fruition without getting too greedy.