Foreign Exchange (forex or fx) trading is the new rage. With easy online access, and small initial deposits, it has become super easy to start trading currencies wherever you are.
That doesn’t mean it is any easier to make money. It is estimated that 80-90% of new foreign exchange traders around the world lose money. When trading forex, you’re trading against the best traders in the world as well as inexperienced masses. Yet, you don’t need to beat them all, just catch a trend and profit from it.
Now, let’s explore forex accounts you can open from tiny to small sums of money. There are many firms offering forex trading services. As always remember to stick with a reputable firm.
The first thing to understand is that forex accounts we’re discussing are for spot forex transactions rather than forex futures and options.
The second thing to know, when trading forex, you trade currency pairs. There are many currency pairs to trade such as EUR/USD (euro vs. US dollar), USD/JPY (US dollar vs. Japanese yen), GBP/USD (British pound vs. US dollar), and so on. The first in a pair is the base currency (EUR in EUR/USD) and the latter in a pair is the quote currency.
There are many types of brokerage accounts. Trading foreign exchange online is another option for retail traders, but be careful. Forex trades are leveraged bets. Leverage is a two-edged sword.
When you see a price of a pair, it shows how much in the quote currency is necessary to buy the base currency. To give an example, if you see a EUR/USD price of 1.0735, it means you need to pay $1.0735 to get 1 euro.
The third thing to grasp when trading foreign exchange is that you trade in lots. There are four major types of lots. There is a nano lot (although not that common) which represents 100 units of base currency, a micro lot which represents 1,000 units of the base currency, then a mini lot representing 10,000 units of the base currency, and a standard lot representing 100,000 units.
So, to buy 1,000 euros at $1.0735, you’d need $1,073.50. But, in the forex market you use leverage, meaning you need to deposit only a small value of the entire transaction. Leverage is a double-edged sword: it can benefit or destroy you. Some online forex trading firms allow for leverage of 500:1, meaning that for every dollar invested, you can trade with $500. That’s not advisable as it’s a way to lose your entire deposit in a forex account in a blink of an eye, and possibly more.
Imagine you want to use leverage of 10:1, thus with little over $107 dollars you can buy a EUR/USD micro lot. You probably can do it with much, much less money, such as buying it with $50 or less. For $100, you can trade two fx micro lots at a time. In fact, to open a forex account and start trading, you can deposit as little as $50-$250!
The fourth thing when selecting an fx broker is to look at the spreads charged. A spread is the difference between the price you buy at and the price you can sell in the fx market. In foreign exchange trading, a basic word to know is the ”pip.” When you see a quote EUR/USD 1.3145, it basically means it’s $1.31 plus about half a cent to buy one euro. The ”45” at the end represents 45 pips. From this you can conclude that there are 100 pips to the cent.
In forex trading, even several pips represent a sizeable amount of money when used with leverage. Forex traders fight to make a profit of few pips. The spread depends on particular foreign exchange broker, your account size, and the currency pair. For a popular pair as EUR/USD, the spread is quite low, and can range from less than a pip to 2.5 pips (or more, which then becomes a bad deal).
Therefore, when selecting a foreign exchange broker, check the spreads. The smaller the spread, the less it will cost you to trade. Indeed, when trading forex on the spot you will just pay a spread, and no commission. The best forex brokers will charge highly competitive, tight spreads.
The fifth thing to understand before opening a forex account, is the need to check what services a forex broker offers. What kind of charts and indicators (for technical analysis), news, and research are provided for free to the forex traders? You need to know it.
Many forex brokers will also offer free foreign exchange demo accounts where you can check the system and practice trading with virtual currency. This is a great way to learn before trading forex with real money. Just remember: Trading forex online with virtual money isn’t the same as doing it with your own cash, the emotions differ, and these can make huge differences in trading performances.
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