Beginner's Guide To Forex Trading
When you buy and sell currency pairs on the foreign exchange (FX) market, that's called forex trading. It was supposed to be a way to allow for businesses to convert currency in order to carry on trade across borders. But the speculation over currency fluctuations is by itself a business.
How you can start off with forex trading and pocket the difference when a currency rises or falls is discussed below. You shouldn't forget, however, that this is cold hard cash you'll be putting on the line. If your trades go south, you end up getting burned.
Start with a demo account where you can make a few rookie mistakes without losing money. Understand how to work with brokers and their spreads, calculate pip values, and figure out FX futures contracts and derivatives. Get used to the timing, since the markets are open 24 hours a day and you'll be working across different time zones.
In the demo account, don't be too caught up in winning. Try to grasp concepts like leverage in a forex contract where you're not actually purchasing currency. Instead, you buy into a contract for a specific currency pair by paying a stipulated amount.
Consider, for example that you pay $1000 for a $100,000 contract. That means you now have 1:100 leverage. If your play works out, you get the full benefits of a $100,000 currency fluctuation. If it doesn't, your $1000 is on the line.
The sums are big, so it's best to get started with reliable and popular currency pairs. The most popular pairs are EUR/USD, GBP/USD, USD/JPY, USD/CHF, EUR/JPY and EUR/GBP. You also need to get yourself a broker who doesn't hog too big a spread.
A broker's spread is the difference between the currency value and what you pay to the broker. This difference is another reason why you need to stick to the popular pairs. Brokers have low spreads for the aforementioned currency pairs.
Spreads for the popular pairs are usually in the range of 1.5 to 3 pips. A pip is a 'percentage in point' or the smallest price increment for a currency. For currency pairs with lower trading volumes, brokers will have higher spreads, which means you need to earn a lot more to see some profit.
To keep things from going out of control, you need to keep track of all your trades in spreadsheets or by using forex trading software. New traders are advised to limit each trade to 2 or 3% of their budget. This helps limit the damage, in case you make any mistakes.
There are two types of forex traders. Some are experts in international geo-politics who understand how, why and when a specific currency fluctuates. Policy and institutional banking experts will typically restrict their forex trading to a few currency pairs they know intricately well.
The second kind is where you pore over real-time forex trading data and try to spot a trend that you can get in on. As with stock markets, brokers have all kinds of tools to help you analyze the data and find something useful. You can make a small fortune with day trades, if you don't lose your head and base your decisions on hard facts.
Article Source: FxTradingStock.com
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Want to find out more about Forex Trading, then visit Sharon Taylor's site on how to choose the best Forex Trading for your needs.
by: Sharon Taylor
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Date: Thu, 15 Jul 2010
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