If you are interested in learning more about forex, investing in stocks, and other investment options, here are five basic things to know about forex trading.
What are some basic things to know about forex trading?
Rule #1: The forex market is volatile
This is one of the most important basic things to know about forex trading. Even the most accomplished trader is taken aback by the ups and downs in the forex market. But volatility is also what appeals to traders of all levels. Why? Because it creates profitable opportunities.
The currencies of all countries move up and down following national economic statistics, world events, political tensions and other factors. Traders around the world trade these currencies as speculators or hedgers.
By knowing when to buy or sell a currency, traders can reap big profits and avoid losses, which is why many traders are interested in increasing their knowledge on price action and predicting trends. If you’re a beginner, it’s highly recommended that you invest only the amount of money that you can afford to lose. Trading with money you don’t really have can lead to devastating results in the event of a loss, so stay smart.
Rule number one: be prepared for volatility!
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Rule #2: Forex is highly leveraged
Perhaps the most misunderstood step in the whole forex trading process is leverage. So, when you read about trading with leverage, let it be known that currency exchange matches investments in a 1:1 ratio. If you put $10,000 into the market, your leverage will work to multiply that investment into $50,000. When you trade with leverage, you're allowed to make trades on an inflated amount of capital without having to actually invest a full $50,000 yourself. Great news, right?
Use a margin account, and you can trade with much more money than you have. So if you've only got $1,000 to invest, the forex brokers will let you borrow another $4,000 so that you can make as many trades as you'd like. This is referred to as using leverage.
Trading with leverage means that a small change in the currency pair price can result in a much larger change in your account balance. Do not risk more than 1% of your capital for each trade (5% or less in a volatile market), and never risk more than 5% per week. You also should know what type of price action triggers your trade entry points and exit points.
Rule number two: know your leverage, and what it means for your account.
Rule #3: Take it slow and test your strategy
It's simple. Use smaller trades to get comfortable and familiar with the trading process. This will allow you to try out different ideas while minimising your risk exposure. You will need to take your time and test your strategy before taking any big risks - this is one of the key basic things to know about forex trading.
Strengthen your understanding of the process, take time to acknowledge risks, and focus on defining your goals. And nobody knows what works best for you but you, so follow your gut.
Rule number three: test, test, test!
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Rule #4: Currency markets trade in pairs
Another point in the most important basic things to know about forex trading is that it involves buying and selling currencies. You need to be aware of the factors that affect the value of a currency and how much risk you are taking into account.
Forex is a market where currencies trade in pairs. For example, the EUR/USD (Euro/U.S. Dollar) pair means that you buy the first currency (EUR) and sell the second one (USD). This is a simple way to make money by buying when the price of one currency falls and selling it when the price rises.
There are no centralised banks governing forex. In other words, the "exchange" isn't a central authority, but instead, it's a market made up of individual buyers and sellers coming together to buy and sell currencies to each other. You can trade any pair that you choose, but some currency pairs are more popular than others based on trading volume.
Rule number four: know your currency pairs like the back of your hand!
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Rule #5: Only trade with regulated forex brokers
When trading with the best forex brokers, you can be sure of a secure and fair environment to trade. First, choose a forex broker that offers complete information on their products by providing platform demos and reviews and details on the products they offer.
With an unregulated forex broker, all your money can end up being diverted for its own purposes. That's why it is important to do a little research before choosing a forex broker.
Brokerage firms need to have a license from the regulator to operate legally. When you choose a brokerage firm, look for one with licenses from reputed regulators like CySEC, FCA, NFA. The FCA regulates brokers within the United Kingdom, so if a broker works with them (as BluFX’s broker does), you can trust it with your money.
Rule number five: make sure a broker is FCA regulated before trading.