Currency Trading or Forex Trading is the largest and fastest growing financial market in the world. Forex used to be only for banks and countries and large corporations but over the last several years, brokerage firms have opened all over the world, allowing and encouraging individuals to get involved in Foreign Currency Trading. There are thousands of brokerage firms all over the world trying to get your business as a trader. It is extremely important for you to know the basics of the Forex Market and how it works before you look to decide on a brokerage firm.
Currency Trading Basics
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Foreign Currency is traded in pairs. A trader purchases one type of currency with another. This is the most basic thing to understand in Forex Trading. The most popular pairs are linked to either the USD or the Euro, because that is the currency that most traders have to start with. Once you go beyond those currencies, there are dozens of other pairs you can trade, It is recommended to have some experience before you trade more complicated pairs.
Once you understand what you are buying and selling, the next step is to understand the prices and how they are quoted. Currency pair prices differ by Pips. A Pip is most often the fourth digit after the decimal point in a price. This represents 1/100 of one unit of currency. This means that if the price of your currency pair goes up 1 Pip and you are trading in lots of 1000 units, you can sell at 1 unit more than the price at which you bought that lot of currency.
Another important term to understand when starting to think about Forex Trading is Leverage. Different brokerages allow you different levels of leverage. Leverage is an amount you are trading while depositing only a small percentage of that amount of actual cash into your account. A brokerage firm offering maximum leverage can both work in your favor or against you because you are spending way more than you deposit so if your trade is profitable that is wonderful for you but if your trade loses, you are responsible for a loss amount that is exponentially larger than the amount of money you put into your account.
When you are ready to start searching for the brokerage firm that is right for you, there are many factors to examine. Every brokerage offers different account levels and each account level comes with its own parameters. It is important to know what you are willing to deposit, how much you can risk and how often you expect to be trading.
No matter which brokerage firm you use, and no matter how often you will be trading, the most important part of being a Forex Trader is your trading plan ans start with low amounts. Not having a tried and tested trading plan based on an established trading strategy is the biggest downfall of traders. To avoid this being your downfall, do your homework. Do as much research as you can and then test your plan using a demo account.
