Where to Start

This section will equip you with everything that you need to know to get started in the forex markets. You will learn how to set up a live forex account with the best Forex trading broker for you.

This way, you can make your first trade using the best Forex trading platform, and the best Forex trading strategy available. Likewise, this section will provide a guide on how to trade Forex as well as the types of orders you can place.

Opening a Trading Account with a Forex Broker

In many ways, trading Forex is just similar to trading in the equity markets. For one, you need to open a trading account first. Each Forex account, as well as the services that the broker offers, also vary. Thus, it is important to find the right broker to work with who can address your particular trading goals and needs.
When choosing the best Forex trading broker, using the services of a company like Binaly.com can make the search process a lot easier and simpler. The company checks out brokers in various markets including Forex, and provides reviews of the most reputable ones like BDSwiss, eToro, and 24Option.

Following are some of the important factors that you should consider when choosing the right broker for you:

  • Leverage – To put it simply, leverage is the ability to obtain a trading position with a large amount of capital, using only a small amount of capital of your own. The higher leverage your broker offers, the higher will be your risk level. The amount of leverage you will enjoy depends on your account. Many trading accounts come with a leverage factor of 50:1, although some can go as high as 250:1.
    A 50:1 leverage factor means each dollar in your trading account will allow you to control as much as $50. To cite an example, if you have $1,000 in your account, your broker will loan you as much as $50,000 that you can use to trade. Leverage also makes it possible for you to have a low margin. You don’t need to fund your account with a large sum of money to trade a large amount of currency. In equity markets, the margin is often a minimum of 50%, and a 50:1 leverage represents 2%.
    Leverage is considered as among the major benefits of forex trading since it makes it possible for traders to make significant gains using only a small investment. On the other hand, leverage can also be extremely disadvantageous in case your trade goes south since it will amplify your losses.
    With a big leverage factor, real possibility exists that you may lose more than the amount you invested, although most reputable brokers have protective stops in place to prevent a trading account from going negative. This is why it is important that before signing up for an account, you must determine the leverage you want and have a good understanding of the risks involved.
  • Broker’s Commissions and Fees – Another major forex trading benefit is the fact that trades are commission-free, unlike when dealing with equity accounts where the broker collects a fee for every trade. There are no commissions in forex trading because you are directly dealing with market makers, and you need not go through third parties such as brokers.
    Despite not collecting commissions and fees, however, market makers still make money each time you enter a trading position. This is through the spread, which is the difference between the bid and ask price. For every trade that you make, the market makers capture the spread. To cite an example, if a foreign currency has a bid/ask price of 1.5200/50, the difference (50 basis points) goes to the market maker.
    When opening a forex trading account, bear in mind that every company has a different spread on currency pairs that you trade through them. Although the difference will only be a matter of a few pips (1 pip = 0.0001), it can accumulate to a significant amount over time. Thus, when you open an account, be sure to determine the spread on the particular currency pairs you intend to trade.
  • Other Factors – Forex brokers differ from one another. The same is true for the various trading accounts they offer. Thus, it is best that you review all your options before settling for one. The services and fees on top of the actual trading costs vary as well. In addition, because the forex market is less regulated, choosing a reputable company is of utmost importance.

How to Trade Forex

Once you have chosen a broker and opened a trading account, you are ready to start trading. By now, you should know the two main ways to trade Forex. First is by buying and selling currency pairs, where you go long on one currency and you go short on another. The other way is by purchasing derivatives that keeps track of a particular currency pair’s movements.
Either of these two methods is very similar to how things are done in the equities markets. In Forex, the most prevalent way is buying and selling currency pairs, which is similar to how stock traders buy and sell stocks. In Forex, you hope that the value of your pair moves to a favourable direction. Going long means you hope that the pair’s value will increase.
Let’s say, for example, that you opt to go long in the USD/CAD currency pair. You stand to profit if the pair’s value rises, and you will lose otherwise. In this case, you are betting on the US dollar because the pair’s value will appreciate if the US dollar rises in value versus the Canadian dollar.

Your other Forex trading option is using derivative products like futures and options to gain a profit from movements in the currency values. If you purchase an option on a pair, what you are actually getting is the right to buy a pair at a pre-determined rate before a pre-determined point in time. On the other hand, a futures contract comes with an obligation to purchase the currency at a pre-determined point in time. Although options and futures contracts are typically used by more experienced traders, newbies will benefit from being familiar with them, at the very least.

Types of Orders

Traders in search of a new opening position often use either a market or limit order. The use of these types of orders is similar to how they are used in equities. Market orders allow Forex traders to get the currency regardless of its prevailing exchange rate on the market. On the other hand, limit orders allow traders to stipulate a specific entry price.

FX traders already holding open positions may consider the use of take-profit orders to lock in their gains. One example is if the trader believes the GBP/USD pair will reach 1.7900, but isn’t confident that it will rise beyond that price. He can then issue a take-profit order that will close his position automatically the moment the price reaches 1.7900, in the process locking the profits in.

The stop-loss order is another tool traders can use when holding open positions. The order provides traders with the option to set the rate at which the price may decline before closing the position, preventing the accumulation of additional losses. In the same example above, when the trader believes the GBP/USD will drop, he can place a stop-loss order that will automatically close his position when the price drops to a specific price, say 1.7795, to keep the position from incurring additional losses.

If you notice, the order types that you can use when trading Forex are similar to the types also used in equity markets. It is therefore recommended that you familiarize yourself with these orders before taking your first Forex trading position.