You don’t have to be an expert trader to use Forex, also known as foreign exchange or currency trading.
If you’ve vacationed in Europe and exchanged U.S. dollars for euros, then you’ve participated in Forex.
Today, trading with Forex has become common. Explore the following four key points beginners need to know before getting started.
Virtual Trading Accounts
If you’ve never invested before, or you want to practice, virtual trading accounts allow you to practice without putting any money down. You won’t lose any money, but you also don’t see any gains. Virtual trading accounts use real-time investments so that you can safely build a portfolio while learning. TD Ameritrade, TradeStation, and Kapitall are examples of brokers that allow you to get hands-on experience before you buy.
Before you jump into trading on Forex, set up a virtual trading account. Individuals who have quoted success with trading on Forex have taken time to build trading skills through practice.
Trading in Pairs
All trading on Forex is done in pairs; you have to buy one currency to sell another currency. Eight countries make up major currency pairs, and they are the most widely traded currency pairs in the world.
For example, look at the euro and U.S. dollar pair. As of this writing, this pair is quoted at $1.177, which means it takes $1.17 to buy one euro. But you have to keep a close watch because the exchange rates are continually fluctuating.
Pip Values and Stop-Loss Placements
Now that you have an overview of trading in pairs, take time to understand pips, percentage in points, before you start trading on Forex. Pips will challenge your math skills because they’re the smallest movement that a currency pair can make, and calculating pips can be tricky. In fact, experts recommend that you don’t start trading on Forex until you have a good grasp on pips.
For currency pairs that display four decimal places, the pip is 0.0001, but currency pairs can go out farther than four decimal places. When that extension happens, brokers quote currency pairs as pipettes or fractional pips. If you’re concerned about financial exposure, don’t worry: You can set stop-loss placements based on pips. Let’s say you buy 10,000 units of euros to U.S. dollars, and you set your pip at -50. You’re risking 50 pips.
Another good part about trading with Forex is that you can trade with leverage. Basically, trading with leverage means you can trade with more money than you have in your account. For example, you’re trading 3 to 1: $1,000 deposited to control $3,000. However, beginners need to take caution with leveraging because if you do it incorrectly, then you increase your risk of loss.
Before you begin trading on Forex, realistically assess how much money you are willing to lose and develop a strategy for trading. Knowledge is the key to trading on Forex, and the more you know, the more successful you’ll be.