Getting Started in Forex

The forex (FX) market is similar to the equity markets in many ways but there are also some key differences. A wide range of online brokerage platforms offer everything from spot trading to futures and CFDs. Understanding your options and what a good broker can do for you can help you get started in forex trading.

Choose a Forex Broker

There are many forex brokers to choose from. Here are some things to look for in a forex broker.

Look for Lower Spreads

The spread is calculated in pips. It's the difference between the price at which a currency can be purchased and the price at which it can be sold at any given point in time. Price changes are described in terms of pips, ticks, and points. A high spread indicates a big difference between the prices for buying and selling. A low spread indicates a narrow difference.

Forex brokers usually don't charge a commission. They make their money on the spread instead so look for a lower spread. You may find a large range of spreads when comparing forex brokers.

Choose a Broker Who's Backed by Regulatory Agencies

Forex brokers are usually tied to large banks or lending institutions unlike equity brokers because of the large amounts of capital required and because they have to provide leverage.

A forex broker should also be registered as a Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). You can check on this and other financial information and statistics at a forex brokerage website, the website of its parent company, or through BrokerCheck at the Financial Industry Regulatory Authority (FINRA) website. 

Get the Tools You Need to Succeed

Forex brokers offer various trading platforms for use by their clients just like brokers in other markets. These trading platforms usually feature real-time charts, technical analysis tools, real-time news and data, and even support for trading systems.

Be sure to request free trials as part of your broker selection process and test the trading platforms. Brokers will also provide technical and fundamental information, economic calendars, and other extensive research. 

Leverage Your Bets

Leverage is necessary in forex because the price deviations and sources of profit are merely fractions of a cent. Leverage is expressed as a ratio between total capital available to actual capital. It's the amount of money a broker will lend you for trading.

A ratio of 100:1 means your broker would lend you $100 for every $1 of actual capital. Many brokerages offer a ratio of 250:1 so give leverage some thought. Less leverage means lower risk of a margin call but it also means less bang for your buck. 

Consider a brokerage that offers high leverage through a margin account if you have limited capital. Any broker with a wide variety of leverage options should do if you have plenty of capital. A variety of options lets you vary the amount of risk you're willing to take. Less leverage and therefore less risk may be preferable for highly volatile and exotic currency pairs.

Choose a Broker With Appropriate Leverage, Tools, and Services

Many brokers offer two or more types of accounts. The smallest account is known as a mini account. It requires you to trade with a minimum of perhaps $250 and offers a high amount of leverage which you'll need to make money with this size of initial capital.

The standard account lets you use various degrees of leverage but it has an account minimum of $2,000. Premium accounts often require significantly higher amounts of capital. They let you use different amounts of leverage and they often offer additional tools and services. 

Forex Broker Actions to Avoid

You'll want to avoid certain red flags as well.

Sniping and Hunting

Sniping and hunting are the premature buying or selling of currency near preset points. They're inappropriate activities used to increase profits. The only way to determine the brokers that do this is to talk to fellow traders. There's no blacklist or organization that reports such activity. 

Suspect Margin Rules

Your forex broker has a say in how much risk you take when you're trading with borrowed money. Your broker can buy or sell at their discretion which can negatively affect you.

Let's say you have a margin account and your position suffers a sudden drop before rebounding to all-time highs. Some brokers will liquidate your position on a margin call at the low even if you have enough cash to cover the change in value. Their action can cost you a significant amount of capital. 

You're required to sign a margin agreement for forex accounts. This agreement states that you'll be trading with borrowed money and the brokerage therefore has the right to intervene in your trades to protect its interests.

Define Your Method of Analysis

Technical analysis and fundamental analysis are two methods used by forex traders to help them determine when to enter and exit the forex market. Technical analysis is by far the most commonly used.

Fundamental Analysis

Fundamental analysis in the forex market is very complex. It's often used only to predict long-term trends but some traders do trade short term strictly on news releases. Fundamental indicators of currency values are released at different times:

• Non-farm Payrolls
• Purchasing Managers' Index (PMI)
• Consumer Price Index (CPI)
• Retail Sales
• Durable Goods

These reports are not the only economic announcements to watch. News coverage and press releases from relevant government agency meetings can also move markets. The Federal Reserve chair's comments on interest rates can cause market volatility. These regular gatherings involve discussions of monetary policy, interest rates, inflation, and other issues that affect currency valuations.

Reading the reports and examining the commentary can help forex fundamental analysts gain a better understanding of long-term market trends. Short-term traders may learn to profit from extraordinary events.

Be sure to keep an economic calendar handy at all times if you choose to use fundamental analysis so you know when these reports are released. Your trading platform or broker may also give you real-time access to the release of economic data.

Technical Analysis

Forex technical analysts analyze price trends similar to their counterparts in the equity markets. The timeframe is the key difference between technical analysis in forex and equities. Forex markets are open 24 hours a day.

Certain technical analysis tools that factor in time must be modified for the 24-hour period as a result. Some of the most common forms of technical analysis used in forex include:

• The Elliott Waves
• Fibonacci studies
• Parabolic SAR
• Pivot points

Many technical analysts combine these studies to make more accurate predictions. Combining Fibonacci studies with Elliott Waves is a common practice. Others create trading systems to repeatedly locate similar buying and selling conditions.

Develop Your Forex Trading Strategy

Most successful traders develop a strategy and perfect it over time. Some focus on one particular study or calculation while others use broad-spectrum analysis to determine their trades.

Experts suggest trying a combination of both fundamental and technical analysis to make long-term projections and determine short-term entry and exit points. Individual traders must decide what works best for them, however, often through trial and error.

Added Considerations

• Open a demo account and paper trade until you can make a consistent profit: Many people jump into the forex market and quickly lose a lot of money due to taking on too much leverage. It's important to take your time and learn to trade properly before committing capital.
• Trade without emotion: Avoid mental stop-loss points if you can't execute them on time. Always set your stop-loss and take-profit points to execute automatically. Don't change them unless necessary.
• The trend can be your friend: Make sure you have a good reason for doing so if you go against the trend. You have a higher chance of success when trading with the general trend of the forex market.

The Bottom Line

The forex market is the largest financial market in the world with a daily volume of $6.6 trillion. Individuals have become increasingly interested in earning a living by trading foreign exchange.

There's a lot to consider before you begin trading, however. Be sure that your broker meets certain regulatory and financial criteria. Find the right trading strategy for your objectives. And remember that one way to learn to trade forex is with a demo account. Use one to practice trading until you're confident enough to use real funds.