Forex Trading 101: How do you start Forex Trading?

Disclaimer: This article has been produced using publicly available content for educational purposes only and does not constitute trading advice or a solicitati

Forex Trading 101: How do you start Forex Trading?

Sep 30, 2022 3:33 AM - Jack Dalton

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Image credit: Jason Briscoe

Disclaimer: This article has been produced using publicly available content for educational purposes only and does not constitute trading advice or a solicitation to buy or sell any financial instrument.

The foreign exchange market is the largest publicly traded market by volume. It's an exciting market in which traders use knowledge of global events to predict how that will affect the currency of different countries. As with all trading, successful predictions will lead to profits! It can be scary to go about the process of opening an account. Realistically, opening a forex trading account is very straightforward, though there are a few foreign exchange considerations to make when selecting your broker. In this article we will cover:

  1. The importance of educating yourself!
  2. Step by step of how to open a forex trading account
  3. What are the pros and cons of Forex trading?

Educate yourself!

When you start trading any financial instrument it is crucial that you spend extensive time to understand that market. Your level of knowledge about the market you are trading within will greatly impact the amount of profit (or loss) that you make. At FMP, we are committed to expanding our educational content but we advise to scour the internet for other resources. There is an abundance of great free information on the internet in the form of articles, videos, and comprehensive guides. Here are some of the best places to start:

How to open a trading account?

If you've done your research and you're ready to dive into the Forex market you will need to open a trading account. Here is a step-by-step guide to do exactly that.

1. Select a Broker

Just like any other market, there are a plethora of Forex Broker options available online. No matter where you are in the world, you should be able to find a reliable online Forex broker. There are some key considerations when selecting a broker. Firstly, ensure that your broker is backed by the correct regulatory authority and a solid institution. You're giving the broker your money so you want to make sure it's a quality institution. Next, consider the size of the spreads. The spread is the difference between the buy price and the sell price (this difference is how brokers make money because they don't charge commissions). The lower the spread, the more profit you can make. There are other considerations such as the amount of leverage available, different account types, and the tools brokers offer. Be sure to do plenty of research into the many broker options available before settling on one.

2. Open and fund your account

Once you've picked a broker, go onto their site and create an account. Be sure to use login details that you'll remember because this website may end holding a lot of your assets. Most brokers require ID verification (a government issued ID should work) and other forms of paperwork (proof of address and residence). Once you've opened the account and your paperwork has been confirmed it's time to load it with money. Most online currency exchange brokers accept numerous payment methods including bank wire transfers, debit card payments or transfers from electronic payment providers like Skrill or PayPal. As we'll discuss later, it's usually recommended that you start with a smaller amount of money and never trade money that you can't afford to lose. Most trading platforms have a minimum deposit requirement of between $250 - $500 USD.

3. Download a Forex Trading Platform

To actually make trades you'll need access to an online Forex trading platform that is supported by your broker. Most foriegn exchange brokers offer their own trading platform (either online web apps or by downloading software) but if not they should indicate which 3rd-party platforms they work with (Make sure to include the trading platform in your initial broker research).

4. Make a trade

Congratulations, you are now ready to trade. You have successfully opened and funded a Forex trading account! Lots of brokers offer a demo platform that allows you to make trades with fake money. It's highly recommended that you spend a lot of time practicing on a demo platform before taking the plunge with real money. Generally, you only want to start making real trades when you are consistently making a profit on your demo account over the period of a few months. Demo accounts are a great way to trial strategies that you learn early on and as you advance your Forex trading skills.

What are the pros and cons of Forex Trading?

Pro: Highly Liquid

The foreign exchange market is the largest and most active market in the world. This makes your Forex investments incredibly liquid. This means that it is easy and fast to enter or exit a position in the market.

Pro: Open all day

Unlike the stock exchange which is only open for about 8 hours a day the Forex market is accessible almost 24 hours a day and 5 days a week. It starts each day with the opening of the Australian and Hong Kong markets, and continues all the way through to the closing of the New York market. There is about an hour between New York closing and Australian markets opening. This means that you can make live trades at almost any time and anywhere across the world.

Pro/Con: Easy to Leverage

Forex is known as a market where lots of people trade with large amounts of leverage. Leverage is when you essentially borrow money from your broker to increase profits. The amount of leverage depends on the regulatory authority but can commonly be 1-100 and as high as 1-400. Though this opens a great opportunity for making bigger profits than your personal capital might have otherwise enabled, the opportunity to lose a lot of money quickly is also increased. Consequently, it is crucial to truly understand how leverage works and the risk associated with it before you make leveraged trades. There are plenty of horror stories where people have lost all their money in a short period of time because they are over leveraged.

Pro/Con: Need to understand Economic Fundamentals

People that have a good understanding of how the global economy works are at a serious advantage. Learning economic fundamentals and indicators from scratch will take a long time but is crucial in Forex trading. A currency trader needs to have a big-picture understanding of the economies of the various countries and their inter-connectedness to grasp the fundamentals that drive currency values. Attaining this type of understanding will only come over time but will be greatly rewarded if you put your knowledge to work.

Rounding Up

Trading on the foreign exchange market first requires you to spend time educating yourself about how the market works and what drives changes. You should do this by reading online guides, watching educational videos, or even taking an online course. Be sure to think critically about the quality of the sources you use for your research. Once you decide to begin Forex trading, you will need to open a foreign exchange trading account. Make sure to pick an online broker that is approved by regulatory authorities and then look at the other considerations such as having a low spread. Once you have opened an account, use a fake money demo account for a significant period of time to learn how the market works and perfect your trading strategy. The Forex market provides a highly liquid 24 hour market for you to trade on. The variety of leveraging options available make big profits possible but should only be done with a full understanding of the risk. Finally, economic fundamentals drive the forex market and will take time to understand. Even the world's best economists are sometimes unable to make the correct predictions when it comes to the Forex market.

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