Forex traders make money on the fluctuating exchange rates between foreign currencies. It is an extremely liquid market and, as such, is popular with online traders.
Types of Forex Trading Accounts:
As well as standard online accounts, mini and micro accounts are available in which smaller stakes can be risked.
Trading currencies through these type of online accounts is classified as spread betting. As such, income generated by Forex trading may be tax free, depending on your country of residence and current tax laws.
How Does Forex Trading Work?
Foreign currencies are traded in pairs and brokers make the majority of their money on the spread, which is the difference between the buy and sell price that they offer, rather than on whether a bet is won or lost. This means, theoretically, that they have no vested interest in the outcome of a trade, or bet. However, some Forex brokers will take selected opposing positions as an extra source of income.
Forex traders have the option to either buy (go long) or sell (go short) one of the currencies within each pair. The fluctuating exchange rate between the pair decides whether the trade starts to rise or fall. Due to the spread, a certain amount needs to be won on each trade before it can begin to rise into profit.
Forex traders usually choose a price at which they are prepared to enter and exit potential positions before placing them. Stop-loss and take-profit decisions are also generally made before a position is taken out. Stop-losses are set at a price where it is thought that enough will have been risked on that particular bet, while take-profit points are set at a price where it is sensible to exit a trade without risking gains already made.
Different Forex Trading Timescales:
Some bets are placed over a longer timescale, while other people prefer to day trade the Forex, where positions are taken out and closed within a few hours, or by the close of business each day. Very short-term Forex trading, over minutes usually, is termed scalping. Each different trading timescale aims to take advantage of larger or smaller fluctuations within the Forex market. Larger changes take place over longer periods of time usually, and more tends to be staked each time. Day traders and scalpers try to take advantage of the smaller, more frequent, price alterations. They generally risk lower stakes.
Five Different Ways to Trade Forex:
There are five main ways to trade the Forex market. Different methods suit different kinds of people. When choosing which way you want to trade, think about how much time you will have to devote to it. Also decide whether you are a person who enjoys taking risks, or not. Work out how much money you can afford to lose on before you start. If the answer to the last question is none, avoid Forex trading until you do have spare money you can use.
1. Trading the Forex market is never risk-free, but one of the safest methods is using managed Forex accounts. Experts run your account for you and take a cut of the profits. If you are risk-averse and/or don't want to, or can't, spend time either learning how to, or actually trading, then this is probably the best option.
2. Forex robots, or expert advisors, are pieces of software that predict likely winning trades based on predetermined criteria. The software is relatively simple to install on most popular online platforms. Once installed it places trades automatically for you, depending on the programmed strategy and selected optional settings. Forex robots that perform well consistently are rare, so it is best to research current opinion on performance before buying. Practice Forex robots on demonstration accounts thoroughly before going live with them and risking your trading capital.
3. Forex signal service providers are plentiful online, either free of charge or as services that you pay for (usually on a subscription basis). Again, services that perform well over long periods of time are hard to find. Also, providers that charge a fee are not necessarily better than those that do not. Using Forex signal providers simply involves following their suggestions. The information usually includes advice on where to enter and exit positions, along with appropriate stop-loss and take-profit advice.
4. Forex traders often use technical analysis to decide when and where to either buy or sell. They study the charts depicting the changing price moves between paired currencies. These charts usually come free with trading platforms and can also be found free of charge online, although some people prefer to pay for charting services. Patterns in the changing price structure are thought to predict potential future moves. Technical indicators which come attached to charts, or can be added, are also studied to help make buy and sell decisions. Forex traders aim to catch upcoming upward or downward trends in the exchange price.
5. Some Forex traders use fundamental analysis. It can also be valuable in combination with technical analysis. This kind of analysis involves studying news and discussions about the currency markets. Predictions are based on the findings.
Warnings and Advice:
It is always advisable to test trading strategies and Forex robots on demonstration accounts before risking real money. Many brokers offer this facility. Use them to hone your skills, or to try out Forex robots, or signal services, before going live.
Read as many reviews as possible for any Forex service or product that you pay for and browse relevant discussion forums. This will help you avoid making mistakes that others have already learned from.
Money management and trading psychology are important too. Learning not to place too much on any one trade will save you from a common pitfall. Total capital can be wiped out too quickly without appropriate money management techniques.
Knowing when to cut your losses and when to take your profit before you risk losing it again is also important psychologically. This can take years to master. Many Forex traders are tempted to chase losing trades, hoping they will turn into winners. At the same time they take profits too quickly in the fear that they will lose them.
Whatever method of Forex trading you try and whichever trading strategy you decide to use, remember that this kind of financial enterprise is risky. Only a small percentage of Forex traders ever succeed in the long term, and almost all lose money in the first year of trading.