You can take the following steps to prepare yourself to start trading forex:
Connect a device to the internet.
To trade forex, you’ll need access to a reliable Internet connection with minimal service interruptions to trade through an online broker. You’ll also need to obtain a smartphone, tablet or computer to run a trading platform on. If your internet drops while you’re trading, that can result in undesirable losses if the market moves against you.
Find a suitable online forex broker.
You can probably open an account with an online forex broker no matter where you live. Just look for one that meets your requirements as a trader and will accept you as a client. At a minimum, the broker you choose should keep your money segregated from its own and operate in a well-regulated jurisdiction under the oversight of a reputable regulator, such as the UK’s Financial Conduct Authority (FCA) or the U.S. Commodity Futures Trading Commission (CFTC).
Open and fund a trading account.
After you’ve decided on a broker, you can deposit funds into a trading account. Most online forex brokers accept a number of ways to fund an account, including bank wire transfers, debit card payments or transfers from electronic payment providers like Skrill or PayPal.
Obtain a forex trading platform.
You will need to download or get access to an online forex trading platform supported by your broker. Most forex brokers either offer a proprietary trading platform or support a popular 3rd-party platform like MetaTrader4 and 5 (MT4/5) from MetaQuotes.com or NinjaTrader.
Start trading.
After completing all of the previous steps, you now have a funded forex account and are ready to trade. You can also usually open a demo account funded with virtual money to test out the broker’s forex platforms and services before going live. Demo accounts are also beneficial for testing trading strategies and to practice trading without risking any funds.
Common Forex Market Terms
The forex market is a world unto itself and has some substantial differences to other financial markets, such as the stock or commodity markets. As a case in point, forex traders have even developed their own set of jargon terms unique to the forex market.
If you’re serious about learning how to trade forex, you should start to get a handle on forex terminology by reviewing the definitions for common terms used in the forex market below.
Currency pair: Two currencies in which the first, known as the base currency, is quoted in terms of the second, known as the counter currency. An example of a currency pair is EUR/USD that represents the EU’s euro quoted versus the U.S. dollar.
CFD: A Contract for Difference is a tool disallowed in the U.S. but offered in certain overseas markets. In essence, if you used a CFD to buy currency for $10 and sold the position for $11, you would get $1. If you sold short on that position, you would pay $1. This method of investing helps you invest in futures without owning the product.
Commodity currencies: Currencies from countries where the economy relies heavily on commodity exports. Examples include: New Zealand, Russia, Canada, Australia, etc.
Derivative: A financial tool that derives its value from another asset, like a currency. Forex derivatives are popular because they can combine the values of two or more currencies and trade shares based on that value.
Position: The net amount of a currency pair that provides exposure to movements in that pair’s exchange rate. Forex traders take positions to speculate on exchange rate movements.
Long/short: A position in which one has net purchased/sold the base currency in a currency pair. Long positions are taken when you think the pair’s exchange rate will rise, while short positions are taken when you think the exchange rate will fall.
Pip: An acronym for “point in percentage” that represents the smallest change in a currency pair’s exchange rate. The size of a pip for most currency pairs is 0.0001.
Leverage/margin: Leverage is the size of a trading position you can control with a given amount of “margin” or money placed on deposit in your trading account to be held by your broker as collateral against trading losses. The maximum leverage ratio varies considerably among online brokers — ranging from 20:1 to 1,000:1 or more — and can depend on what jurisdiction you reside in.
Exchange rate: The amount of the counter currency required in exchange for one unit of the base currency in a foreign exchange transaction. For example, if the EUR/USD exchange rate is 1.1700, it would cost $1.17 to buy 1 euro.
Risk/reward ratio: An estimated measure of the profit potential per amount risked. For example, a trader might use a 1:3 risk/reward ratio meaning that they are willing to risk $1 to make $3.
Broker: An intermediary firm that executes transactions in financial markets on your behalf. Retail forex traders open trading accounts with online brokers to trade currency pairs on margin.
Order: An instruction given to your broker to execute a transaction for you. You might place an order to buy 100,000 euros versus the U.S. dollar at the prevailing market via your online broker’s trading platform.
Forex Trading Example
The most actively traded currency pair in the forex market is EUR/USD, which consists of the EU’s euro quoted with the U.S. dollar. If you thought the EUR/USD exchange rate was going to rise from its current 1.1700 level, then you might purchase €100,000 against the dollar today at that rate. If the EUR/USD rate then rose to 1.2000, you could use this calculation to compute your trading profit:
€100,000 x (1.2000-1.1700) = $3,000
To then convert that amount of U.S. dollar profit into euros at the current 1.2000 exchange rate, you would use this calculation:
$3,000 ÷ 1.2000 = €2,500
Alternatively, if the EUR/USD exchange rate instead fell to 1.1400, then your trading loss would be:
€100,000 x (1.1700-1.1400) = -$3,000
That loss converted into euros at the prevailing 1.1400 exchange rate would be:
-$3,000 ÷ 1.1400 = -€2,631.58
Best Online Forex Brokers
Your local retail forex regulatory environment will often determine whether international online brokers will accept clients from your country. Check with a broker directly to find out whether they will accept you as a client and make sure they provide all the services and tools you require. Also, make sure the broker is well regulated in their local jurisdiction by a major regulatory authority and segregates clients’ money from its own.
Once you have narrowed your selection down to a few suitable brokers, look over their online reviews and see if they have a relatively satisfied customer base. If you don’t recognize the firm, then see how they compare to a well-known and regulated online broker by checking out this Brokersview.com Review. Also, consider opening a demo account to try out its trading platform and services before you fund a live account.