Foreign exchange is the most liquid financial market because it involves trading currencies on a global level. It includes individuals, banks, corporations and governments, and is not solely for investment. News at the national level directly impacts the currencies, and it takes some time to develop Forex skills on the technical and fundamental level. However, if you intend to trade in the Forex market, it is important to gain a strong understanding of these skills. The amount of leverage used in Forex trading can create large losses off one mistake.
Honing Your Forex Trading SkillsStep 1
Find a broker that offers a practice account. Even before depositing money, make sure you check fee structures and other requirements because you do not want to practice on an interface you will exclude later due to high fees. Also, decide if you want a U.S. firm that offers a maximum of 20:1 leverage, or an international firm that can offer up to 500:1 leverage. That means you can get $20 of trading power for every $1 deposited, or $500 for ever $1 respectively.Step 2
Open a paper trading account with the amount of leverage you want to use. If you are using an international account, only use 500:1 if you plan on using that amount of leverage for real. Also, set your starting cash to what you would use.Step 3
Get used to the interface and the tools available, as they can differ greatly from what a stock trader would be used to, or even a different Forex brokerage. Knowing how to place the correct orders quickly is critical.Step 4
While getting used to the interface, read books and articles that discuss Forex strategies, then try them out on a practice account. Do not just finish the book and move on to the next one. Familiarize yourself with the material you are reading.Step 5
Familiarize yourself with both the fundamental and technical aspects of trading. The technical analysis in Forex is similar to stocks. The fundamental side is trickier because you are analyzing each country in a Forex pair because all trades in Forex involve the relative value between two currencies, such as the U.S. dollar vs. the euro. Also, the global economy weighs on both countries, and you have to decide the effect on each, then compare them relative to one another. Focusing on only one side of trading like some people do in stocks is less effective in the Forex market due to its scale and the volatility that comes with leverage. You cannot choose just technical analysis or just fundamental analysis because both have significant short-term and long-term impacts.Step 6
Get used to the trading schedule because the Forex market is a global market, and is open 24 hours a day, five days a week. In the U.S., that runs from Sunday night to Friday, with deviations depending on your specific location. Trade your paper account as realistically as you would your real money. You do not want to be away from your computer when you have open positions unless you are using a long-term strategy with a significant cushion of cash free in your account to absorb drawdowns, which are declines in value of your account that could trigger a margin call. In Forex, a margin call will liquidate your positions right away if your account value drops fast enough unless you can deposit money right away.Step 7
Once you can handle the schedule and the difficulty of profitably trading foreign exchange, you can deposit money and start trading for real. Practicing with a paper account is critical for skills-building because learning by doing is the most effective way to learn. Eventually, real money must be used to learn proper money management and hone your skills further.
- High leverage is tempting, but less leverage can create a better trading environment with less account volatility. Using 10:1 leverage is usually enough.
- Some Forex brokerages include MBTrading, FXCM and Alpari.
- The high amount of leverage available in Forex trading is a benefit and a curse. Gains can come quickly, but so can losses; volatility is magnified, with small movements in the currency amounting to large gains or losses.
- Most people who get into Forex trading blow a couple of accounts, which means you lose all the money you deposited.
Nihar Patel covers finance and investing for several online publications, including Seeking Alpha. He also runs his own investment analysis website. Patel holds a J.D. from UC Hastings College of Law, as well as a bachelor's degree in political science and history from UC Davis.