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Starting Out in Forex Trading

by Richard Ratchford

The foreign-exchange ("forex" or "FX") market is the place where currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.8 trillion per day.

The forex market is open 24 hours a day, five days a week, with currencies being traded worldwide among the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - spanning most time zones. There is no central marketplace for currency exchange. Trade is conducted over-the-counter.

The forex has been the domain of government central banks, as well as commercial and investment banks. It has also been used for hedge funds by large international corporations. The rules were revised during the 1980s to allow smaller investors to participate using margin accounts. It is because of these margin accounts that forex trading has become so popular. When you consider that a 100:1 margin account allows you to control $100,000 of currency for just $1000, this has created an excellent opportunity for making a great deal of money. Of course, such leverage is also a recipe for losing a great deal if you are not properly prepared. Naturally this course is designed to help you become prepared.

FOREX traders usually require a broker to handle transactions. Most brokers are reputable and are associated with large financial institutions such as banks.

Like anything else, you should shop around for the best bang for the buck when looking for a broker. Here are some things you should look for when considering a broker:

A Respectable Quality Institution - Forex brokers are usually associated with lending institutions or large banks. The reason for this is that such institutions have the large amount of capital needed in order to provide the leverage needed. Look for brokers that are registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). This information should be provided on the broker's webpage or its parent company page.

Lowest Spreads - Forex brokers do not charge a commission such as Futures brokers do. They make their money from the spread, which is calculated in "pips". The difference between what you can buy the currency for and what you can sell it for is the spread. PIP stands for Price Interest Point. It is the increment in which the currency pair will trade. For example, if you buy the EUR/USD for 1.2015 and it goes up to 1.2016, it has gone up 1 pip. When looking for a forex broker, find one that offers you the lowest spread for the currency pairs you plan on trading.

Types of Accounts - No two traders are alike. Some have a vast amount of money while others have smaller accounts in which to trade. Look for a forex broker that provides you with some account choices. For example, traders with small accounts or just learning how to trade in the forex should look for what many brokers call the "Mini Account". This type of account requires a small minimum to open, say, $250. This account allows for a high amount of leverage that you will need in order to trade with so little amount of money. In such an account, you can trade with a $1 pip, as opposed to $10 or higher pip value. Standard accounts have higher minimum balance requirements and allow for trading at different leverages. Read carefully the different types of accounts being offered.

Available Leverages - Leverage is important in forex because the price deviations (how you make your money) are merely fractions of a cent. Leverage is the ratio between the capital that is available and actual capital. The leverage depends on what the broker is willing to lend you. For instance, 100:1 ratio means that for every 1 dollar of your money (actual capital) the broker will lend you $100 (available capital). Some brokers offer 250:1 and even 300:1 ratios. The higher the ratio, the more leverage (bang for the buck) you will have. Keep in mind that a high ratio not only gives you more bang for your dollar but it also increases your risk of a margin call. Lower ratio will lower your risk of a margin call, but it will also lower the power of your dollar.

Extra Goodies (Tools, Research) - To get your business brokers provide various free tools and information resources to their customers. You will want to find a broker that will provide you with free real-time price charts as well as an excellent online trading platform. One very popular platform and the one I currently use is FX Trading Station. But shop around and see what is being offered.

The best thing you can do is to ask around on various trading forums where forex traders haunt. This is because there does not exist any blacklist for those brokers that may commit acts of sniping or hunting, which is prematurely buying or selling near preset price points in order to increase profits. Also, make sure that they are happy with the broker's margin rules. Some may be too strict and get you out when the market moves against you although you still have enough capital to hold the position. The position may turn out in your favor had you not been exited by the broker. This can be costly. So ask around!