You may have been hearing about the foreign exchange market (Forex) and
the investment advantages it offers. You would like to try it out, but
don't know where to start. This short guide will give you the basics
in Forex and tell you what you need to participate in this fast growing
field.
Foreign exchange used to be limited to large players such as national
banks and multi-national corporations. In the 1980's the rules were
revised to allow smaller investors to participate using margin
accounts. Margin accounts are the reason why Forex trading has become so
popular. With a 100:1 margin account, you can control $100,000 with a
$1,000 investment.
Forex is not simple, however, and education is needed to make wise
investment decisions. Although it is relatively easy to start trading
on the Forex, there are risks involved, so finding out as much as
possible about the market is a good move for any beginner.
Forex traders usually require a broker to handle transactions. Most
brokers are reputable and are associated with large financial
institutions such as banks. A reputable broker will be registered as a
Futures Commission Merchant (FCM) with the Commodity Futures Trading
Commission (CFTC) as protection against fraud and abusive trade
practices.
Opening a Forex account is as simple as filling out a form and
providing the necessary ID. The form will include a margin agreement
that states that the broker can interfere with any trade it deems to be
too risky. This is to protect the interests of the broker — most
trades, after all, are done using the broker's money. Once your account
has been established, you can fund it and begin trading.
Many brokers have different types of accounts to suit the needs of
individual investors. Mini accounts allow you to get involved in Forex
trading for as little as $250, while standard accounts may have a
minimum deposit of $1000 to $2500 depending on the broker. The amount of
leverage — using borrowed money — varies with accounts. High leverage
gives you more money to trade for a given investment.
HOWEVER — beginner traders are advised get accustomed to Forex by doing
paper trades for a period of time. Paper trades are practice
transactions that don't involve real capital. They allow you to see how
the system works while learning how to use the various software tools
that are at provided by most Forex brokers.
Most online brokers have demo accounts that allow you to make free
paper trades for up to 30 days. Every new Forex investor is strongly
advised to use these demo accounts at least until they are showing
consistently steady profits.
Each broker has their own set of software tools to aid in making
transactions, but there are a few tools that are common to all Forex
brokers. Real time quotes, news feeds, technical analyses and charts,
and profit and loss analyses are some of the features you should expect
to see on most online brokers' web sites.
Almost every broker operates on the Internet. To access their online
services you should have a reasonably modern computer, a fast Internet
connection, and an up-to-date operating system such as Windows XP. Once
your account is set up, you can access it from any computer — just
enter your account name and password. If for some reason you are not
able get access to a computer, most brokers will allow you to make
trades over the phone.
Trades are commission free, meaning that you can make many trades in
one day without worrying about incurring high brokerage fees. Brokers
make their money on the 'spread' — the difference between bid and ask
prices.
