If you want to venture into Forex trading, there are many important things that you should learn first. Opening a Forex account may be easy, but trading currencies could be a challenge if you’re not well-equipped with knowledge.
As an aspiring Forex trader, you need to know its fundamentals before creating your first Forex trading account. This means learning the concepts, knowing the different strategies, and being updated on the latest forex news and trends.
There’s no doubt that Forex trading is a great investment opportunity to grow your money. Just like stocks, Forex trading involves buying and selling, but instead of shares, you’re trading currencies. In short, you’re investing in currencies of different countries to profit by selling the currency when the value increases.
Many investors are fond of Forex trading because it’s more liquid compared to other investment types. Trading is also open and available 24 hours a day, and its volatility means more opportunities to profit.
Like other types of investments, it’s not advisable to dive into Forex trading without fully understanding its twists and turns. Proper research is a must to widen your knowledge before trading. And when you’re ready to trade, it’s time for you to create your Forex account.
Before you create your first Forex trading account, be sure to be mindful of the following considerations to make the right decision.
1. Choosing a reputable forex broker
Your Forex broker provides you with a trading platform to buy and sell currencies, and it’s not hard to find one. What you should be careful about is picking the one that you can trust.
Many Forex brokers promise a great return on investments and have a professional-looking website, but some can be a fraud or are guilty of malpractice. For instance, did you know that in the United States, a reputable broker must be registered with the National Futures Association (NFA)?
And that’s not enough. You can conduct background research by reading reviews online or joining Forex forums. Here, you can learn about the good and bad experiences of traders with different Forex brokers.
2. Knowing the different forex account types
After choosing your Forex broker, it’s time to identify the type of Forex account you’d want to create. Most brokers offer three Forex account types. Feel free to choose yours, based on your risk appetite and investment goals.
- Cash Account. Of all account types, this is the most conservative. Here, you deposit cash into your account which will be kept until you’re ready to trade. You also pay for the trades in cash.
- Margin Account. With a margin account, your broker allows you to borrow money to make additional investments and cover payments for the trade. After the trade, you pay off the money at a certain interest rate.
- Managed Account. If you don’t have the time or knowledge to trade yourself, a managed account allows your Forex broker to do the trading on your behalf. It works the same way when you hire a professional fund manager to maintain your traditional investments.
3. Understanding the market
It’s never wise to invest in something you don’t understand well. Forex trading entails risks, and the changes in the market could cost you big money if you don’t have a strong foundational knowledge.
You can read Forex news and updates to keep yourself abreast of the market trends. Equip yourself with the best Forex trading strategies through credible resources online. You can even start your trading skills using Forex simulators in which you use fake money in buying and selling currencies.
4. Learning about leverage, broker commissions and fees
Leverage allows you to have large amounts of capital despite starting with small money. But this can be tricky. Some brokers offer a leverage factor of 1:100, which means that you can trade up to $100,000 with a $1,000 deposit. While it can boost your gains, it can also intensify your losses.
On the other hand, Forex trading is free from commissions unlike stocks, since you’re dealing directly with market makers. This means that you only cover one transaction cost which is the pip spread. Before opening your first Forex account, make sure that you know the pip spread on foreign currency pairs you’d want to trade.
5. Reading charts
Regardless of your trading method, knowing how to read a Forex chart is basic. You can use it to guide your trading decisions and predict market movements.
In a nutshell, a Forex chart is a graphical depiction of how the exchange rate between two currencies has changed over time (such as fluctuations). The period illustrated in the chart depends on the timeframe you select. By default, a Forex chart shows a daily timeframe.
You can never say that you’re ready unless you try Forex trading. Experience is, indeed, the best teacher when it comes to investing. But knowing the fundamentals before diving into it gives you a head start. Arm yourself with knowledge and keep yourself updated with Forex news and trends. These things can provide you with the best guidance to arrive at the right investment decisions you could ever make.