Basics of Forex Trading

If you are thinking about trading in the forex market, you will need to learn the basics before getting started. This fast-paced exchange offers constant opportunities for profit, but you can lose money quickly as well. Therefore, it is important to be well-versed in the fundamentals you proceed, as well as a good approach to money management. To help you learn about the information and skills you need to succeed, let's examine this topic in more detail below.

24 Hour Market Access

When compared to other exchanges and investment options, the first benefit the forex boasts is its 24 hour access. You can trade anytime of the night and day, from nearly any location on the globe. This means it is a terrific choice for those who are working during normal business hours. While other markets are closed or have sluggish activity in the off hours, the forex has action all through the night! This is because other countries need to exchange currency as well, so when one location tapers off its participation the next takes its place.

For example, in the evening Europe won't provide much activity, but for Asia it will be peak trading hours. Is the forex really this active every hour of the day? The answer is yes, due to the much higher trade volume of the forex exchange. If you compare the forex to stock or equity trading, it has much larger numbers of orders consistently.

Forex Trading Basics Why is this important? Well, for one, you can't profit if the price doesn't move. Secondly, this provides a high degree of liquidity, so you typically get the price which you ask for. This is because there is more demand for the product, unlike stocks or equities where you may pay more of a premium. This difference in desired and actual price is termed slippage, which is measured in pips. This slippage can occur in fast or highly volatile market conditions, or if you execute your trades by hand.

However, there is an alternative to manual trading which is called automation. When studying the basics of forex trading, you need to learn how to use this valuable feature. It is simply the process of using trading software which has your desired parameters programmed in. The trading platform then executes your trades for you, without any outside intervention. This can be a highly efficient approach, and is a tremendous strategy to implement for superior performance!

Trading Leverage

Next you need to understand leverage, to get the most from each position you enter. In fact, forex brokers provide more leverage than any other type of market broker today. It is not uncommon to see 200 to 1 ratios offered, and some companies extend an astonishing 500 to 1 leverage ability! How can leverage help you turn a profit? It gives you a method for customizing your risk, and can create new and unique strategies not available without such a feature.

For example, a stable currency may fluctuate only a few percentage points every day, not giving you much movement to work with. However, if you are leveraged at 100 to 1, then a 1 percent move can double your money! This is an amazing option, and one which other markets don't offer to such an extent.

Yet, you need to stay cautious, especially in the beginning. After all, with a highly leveraged position, a small move against you can represent a large loss. That's why it is a good idea to take it slow, and gradually ratchet up your leverage ratio. In fact, this ability to select your level of leverage risk on a trade by trade basis, is one reason the forex is such a powerful investment vehicle. If you opt for no leverage, or a ratio of 1 to 1, then you are greatly insulated from market movement. That means your risk is far lower, and you can slowly build up until you are comfortable with higher numbers.

Fundamental vs. Technical Analysis

If you are just starting out with forex trading, you need to decide if you prefer fundamental or technical analysis. With a fundamental approach you will focus on items like interest rate expectations, to determine if a currency is either too high or low in price. In contrast, technical analysis ignores this information, and looks at historical data instead.

Here you will be examining charts, trying to spot a current trend in the price movement. Each has its specific strengths and weaknesses, but concentrating on one will give you the best chance of success. Why is this? This gives you an opportunity to become highly proficient, rather than being only average at two separate methods.

How can you decide which approach you should use? Your overall strategy, trading style and personality can inform you when it comes to selecting. For example, if you are investing for the long term, then a fundamental analysis will probably suit you best. For shorter term trading, technical analysis is usually preferred.

However, once you've mastered one method, you can then use the other to add more information into your decision process. Yet, it is probably wise to focus on only one approach at first, for the reasons mentioned above. With targeted attention mastery is gained, and you need to have a firm grasp on your research tools if you want to profit when trading.

Currency Pairs

Finally, the last item to cover when discussing the basics of forex trading is currency pairs. This is how you actually create a position, by choosing two currencies which you believe will move a certain way in relation to one another. For example, you will want a currency which you think is strong or weak for your first selection. Why? If you believe the price will move up or down, you will then profit if it does so.

However, you need to pick a second currency as well, which will act as a baseline for the first. In this case you want a currency which will remain steady or move in the opposite direction from the first. While this sounds somewhat complicated, it is actually quite simple. Say, for example, you've chosen the British Pound and the Canadian Dollar. If you are bearish on the Canadian Dollar, you want its price to fall lower. Yet, at the same time you want the British Pound's price to stay constant or move even higher. How does this benefit you? You profit from the more favorable exchange rate which then occurs when the price moves in your favor.

Conclusion

So, there are the basics of forex trading. Having covered how the forex has 24 hour access, high available leverage, several analysis options and currency pairs, you now have the fundamentals which you will need. This information will help you to get started, giving you a head start on understanding the markets. Another excellent strategy is to open a demo account as well, as this will give you real trading experience. Yet, it uses simulated funds, so you can learn without paying for your mistakes. Simply take it slow and master each step and concept thoroughly, and you'll be closer to making a profit by trading the forex!