Forex trading has always been a mystery for me until about couple of weeks ago when I started reading more about it. For most people forex trading is something that is meant for the corporates & banks and perceived as a very complicated thing to do. Now, after doing enough research, I realized that it is the one of the easiest make money online instrument to get started and make money instantly – of course with its associated risks. In this post, let me explain the basics of forex trading and how easy it is for anybody to get started with online forex trading pretty quickly.
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Forex trading for beginners – Basics
Forex market or currency market (or simply FX) is the place where currency trading takes place. It primarily facilitates the exchange (buy / sell) of currencies from one to another and is the backbone of international trade and investment between countries – major banks being the main parties involved. For example, if a US company has to import something from Japan, it has to pay in Japanese Yen and and hence need to convert the US dollars into the acceptable currency. This happens on a continuous basis round the clock to help with global trades and hence make a mammoth US $7 trillion daily turnover which is bigger than any stock market turnover.
Forex trading by individuals is nothing but the act of involving in the above process with your small amount of money whereby you buy and sell currencies at the prevailing market price.
Basically, when you buy a particular currency (e.g. US Dollar), it is exchanged against another (e.g. Euro) and hence the entity that is traded is known as a pair. For example USDEUR is a pair whereby you are trading US Dollars against Euro and you buy (or sell) that pair at something like 1.5000 per pair.
Just like the stock market, you buy or sell – not shares but pairs.
Difference between Forex trading and Stock trading
Many of us are familiar with the stock markets and share trading. The currency trading is slightly different from stock trading because of the following reasons.
In the stock market, there are too many (thousands) companies and their stocks that you need to track. But in the currency market, you mainly deal with those leading currencies in the world. Fourteen of these major currencies count for majority of the transactions. They include US Dollar (USD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Australian Dollar (AUD), New Zealand Dollar (NZD) and Swiss Franc (CHD). The other currencies are traded as well but these are trader’s favorites and high volume currencies.
The stock market is active only for a certain number of hours per day and you transact in a particular stock market (e.g. NYSE) at a given time. But currency trading is done 24 hours a day in some market or other and you don’t need to worry about where you are trading. The trading system takes care of this part and simplifies things for you
Because of the leveraging (margin trading), even a small amount such as $50 can get you exposure to buying 1000s of units of a particular pair
Even a small change (such as 0.0001) in the price can result in a significant return on your investment due to leveraging
Volume is so high that buy and disposal is easier.
Usually there is no account opening fee or even brokerage charges – the forex company’s commission is only the difference between the sell and buy price at any time (buy price will be always slightly more than the sell price at any time)
There is no physical shares, documents or dematerialized form of the traded currencies maintained anywhere. The trading system just keeps your buy-sell status.
Due to the huge volume nature and global span, currency market cannot be manipulated by traders where as stocks, sometimes, can be manipulated by insiders and market makers
How to forex trade?
In order to trade forex you need to open an account with one of those online forex trading agencies. There are plenty of them to choose from and I found that eToro is a good platform for the reasons mentioned in the next section. Once you sign up, all that you have to do is to add money to your forex trading account and start trading. Money transfer to the account can be via PayPal, Credit card, bank – wire transfer and many other online money transfer options. Of course, after signing up one still has the option of continuing with the practice account without adding any real money to your account.
It is a matter of couple of minutes before you start trading but wait till you do your homework. All your money can disappear in no time if you are not careful. This is why practice trading accounts are useful. Most trading platforms allow a practice account whereby you can trade using virtual money but use real time features such as price quotes, charts etc.
Easy forex trading with eToro
If you Google for ‘forex trading’ you may find plenty of online forex trading platforms. I found that eToro was pretty good due to the following reasons:
You can open an eToro forex trading account with as low as $50 initial deposit.
On top of your first time deposit (FTD) they will add a welcome bonus of 25%. i.e. if you start an account with $1000, they will add $250 and hence you are already starting on profit. The bonus has a cap of $1000 (There are companies who give even 100% bonus but beware of their hidden costs).
No hidden costs or brokerage charges.
You get a personal account manager (PAM) assigned to you if you start an account with at least $500. This means that you will get regular phone calls on trading ideas based on global economic and forex news.
Leverage up to 400 times and it allows micro-lots (see Forex terminologies below)
eToro provides an excellent web based trading tool as well as a fast desktop based trading tool.
You can add or withdraw funds via PayPal. This may be one of the major criteria for bloggers who already have their blog income in PayPal. Many other platforms don’t support PayPal transfer.
Excellent customer support – via phone, email as well as live chat.
The practice account to get used to forex trading is very good and uses realtime data.
Frequently asked questions – FAQs on Forex Trading:
The following are some of the frequently asked questions on FX trading:
Why many of the Forex trading companies are in Cyprus?
Cyprus (or even British Virgin Islands etc) is the place where many of these online Forex trading firms are setup and there are many reasons for this. Firstly, it’s a European Union (EU) country and hence Euro based economy. The low cost of living is another factor while being very near to Europe (it’s more like a Eurasian country) and it boasts world class infrastructure for businesses to get started there. Another important factor is that the investors can withdraw money without much tax implications.
Is forex trading legal in India?
As far as I know, the Reserve Bank of India does not allow any resident Indian citizen to trade on Forex unless he or she does it through Indian participatory banks. That too they allow mainly USD-INR pairing. Hence I would suggest Indians to stay away from Forex trading. However, if you are a non-resident Indian, there is no issue. The other option is operate with the accounts of any friend or relative abroad. Needless to say, most other countries permit foreign exchange trading by individuals.
Forex glossary:-
Base currency: The primary currency that you are trading or interested in. e.g. in a EURUSD currency pair, Euro (EUR) is the base currency and USD is called the quote currency.
Counter currency: Same as the quote currency or second currency in a pair.
Buy price (Ask rate): The price at which a buyer can buy a pair.
Forex: Foreign Exchange or FX.
Leverage: Leverage the loan from your broker that allows you to trade 100 or 200 times of your capital. E.g. it is possible for you to buy 10000 USDEUR with even $100 by applying the right leverage size. This can potentially increase your gains multifold but has the risk of loosing as well.
Lot: Lot is the standard unit of trading. Typically the standard lots are 100,000 units, mini-lots are 10,000 units and micro-lots 1000 units.
Open position: Your current holdings or trades that are not closed yet.
Pip: Pip (or Point) is the smallest price change that can be made on a currency pair quote. For most currencies (except for JPY combinations), the pip is usually a basis point or 0.0001. Hence the price movements are always in units of 0.0001 and smaller values than that. It may be noted that most forex quotes are in four decimal places.
Sell price (Bid rate): The price at which a pair can be sold.
Short Position: Going short means that you are opening sell order hoping that the prices of a currency pair will fall. Later you can close that position at lower prices thereby booking profit.
Spread: Difference between the current buy and sell prices.
Stop Loss: The automatic closure price specified just in case your pair moves the other direction than expected. The stop loss order makes sure that you are protected from further losses by automatically closing the open positions at that specified stop loss price.
Forex Tips as shared by experts:
Never invest too much initially, start with smaller amounts.
Use stop loss effectively to limit your losses.
Never use high leverages initially. Stick to x5 to x25 range max. Never leverage 100 or 200 times until you become a pro.
Practice a lot on the practice trading account before putting your real money.
It is better to start trading on Silver or Gold rather than directly jumping into currency trading. The same platform allows you to trade silver/gold.
Never take emotional decisions. If your pair is loosing, just exit by booking losses. If it’s going up, exit at the pre-decided price rather than waiting for more
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Happy Money Making !!
