Getting started in the Forex Market
Are you planning to deal in foreign exchange trading, but are confused with the terminology, and how to go about it exactly? Well, here are some basic concepts about this kind of investing.
Let’s start with the definition of the term ‘Forex’. The word means Foreign Exchange Market
. It is an international market wherein money is bought and sold freely, i.e. the currencies of different countries are traded. The prices of any particular currency in this market are ascertained by comparing with the others that are traded in the market.
The first step towards getting started in Forex trading is choosing a broker. As with any other market, there are many brokers to choose from, and selecting the right broker makes a big difference. Given below are some basic factors that you need to know while engaging a broker:
Lower Spreads save money: The spread, which is calculated as ‘Pips’ (smallest price change that a given exchange rate can make), is actually the difference between the price at which a currency can be purchased and the price at which it is sold. This difference is the source of income for Forex brokers, as they don’t charge a commission. Therefore, while comparing brokers, you will often find that the difference in spreads is as great as the difference in commissions in the field of stock brokering. So the bottom line is that the lower the spreads, the more you save money.
Tie-ups with quality institutions: Forex brokers need to provide large amounts of capital in the form of leverage. Hence, they tie up with large banks or lending institutions. Investors should also check if the Forex broker is registered with the FCM (Futures Commission Merchant) and are regulated by the CFTC (Commodity Futures Trading Commission).
Find a broker with extensive tools and research: Forex brokers usually provide their clients many platforms to trade. These platforms include technical analysis tools, real-time charts, real-time news and data, technical and fundamental commentaries, research works, economic calendars, and even support for the trading systems. For better trading experience, request your broker to provide free trials to test the various platforms.
Check out for a wide range of leverage options: A Forex broker lends his/her investors credit for trading, which is known as leverage, and this amount can be expressed as a ratio between the total capital to the actual capital. For instance, if the broker is offering a 100:1 ratio, that means for every $1 of actual capital from your side the broker will lend you, or leverage you, by $100. Hence, since a lower leverage means lower risk and higher leverage means higher risk, make sure that your broker offers you a lot of leverage options, so that you can vary the amount of risk.
Right account types: Forex brokers usually offer two or more types of accounts at a time. The smallest account starts with an investment of $250, and it is usually backed up by a high leverage ratio. The standard account requires a minimum investment of $2000 and is backed by different leverages. And the last type of account is the premium account. This account not only requires a substantial amount of investment, but also needs to be backed up by different leverage options, along with other tools and services.
And now, here is what you need to know about what you should avoid while choosing a broker:
Premature buying or selling near preset points: This is also known as sniping or hunting, are unprincipled acts perpetrated by brokers to increase their profits. Avoid such a broker. Find out from fellow traders and online forums to find an honest broker.
Strict rules of margin: While trading with the leveraged amount, the broker usually has the main say about the amount of risk you can take. Generally, the broker you hire can use his/her discretion to buy or sell, which could be bad for you. For instance, if you have a margin account, and your position takes a sharp dive, some brokers will liquidate your position on a margin call even if you have enough cash to cover, and this can cost you dearly. Hence, find out about the margin rules.
Now that you know the do’s and don’ts while engaging a broker, you can begin learning about some basic Forex trading strategies. The two basic genres of strategy in the Forex market are: technical analysis and fundamental analysis. However, technical analysis is the strategy that is most commonly used by Forex traders. Here is an overview of both strategies:
Fundamental analysis: It is very complex and is usually used only to predict long-term trends. Sometimes however short-term predictions are also made on news releases. Some of the major indicators of the currency value at different times are:
Consumer Price Index
Purchasing Managers Index
Along with these, there are other factors as well, like currency valuation meetings where quotes are discussed along with commentary, which also have the ability of affecting markets. The two important meetings to watch for are the Federal Open Market Committee and Humphrey Hawkins Hearings.
Technical analysis: This mainly analyzes the price trends. Some of the most common forms of technical analysis are:
The Elliot Waves
The technical analysts usually combine two or more strategies for more accurate market forecasts.
There are many opinions about which strategy is good for which market condition, but ultimately it is up to the trader to decide which strategy or combination of strategies will work out best for him or her.