People who are not familiar with currency trading, also known as Forex trading, must see it as something very exotic, quite difficult to comprehend and generally unreachable. In reality, however, nothing could be farther from the truth. While becoming a Forex expert will take a little time, its important to know all about Forex at its most basic level –and that is how a Forex trade works.
- You choose the two currencies that you want to open a trade on.
- You determine the amount you want to trade.
- You determine the type of trade you want.
- You review the trade and make any changes (or change your mind)
- You initiate the trade.
- You sit back and watch the action happen.
- You count your blessings or lick your wounds.
Let’s expand on each step just a bit.
1) Choosing your two currencies to pair; you have a choice among hundreds, but most currency traders know to steer clear of currencies that are not frequently traded. That leaves you with what are known as the “hard” currencies; these include currencies from the United States (the U.S. Dollar or USD), the United Kingdom (Great British Pound or GBP), Japan (Yen or JPY), the Euro-zone (Euro or EUR), Switzerland (Swiss Franc or CHF), Australia (Australian Dollar or AUD), New Zealand (New Zealand Dollar or NZD), Canada (Canadian Dollar or CAD) and to a lesser extent, China (Chinese Yuan or CNY) and Hong Kong (Hong Kong Dollar or HKD).
2) Determining the amount to trade is entirely up to you; factor into the equation not only your trading account balance, but how much risk you are willing to tolerate (just in case your trade does not win). It’s important to know that you will never lose more than you trade.
3) Deciding which type of trade you want to put through; you have an option from among several choices, but we’ll give you the most basic two, which are the spot and futures markets. The spot market is the most straightforward; it is simply the immediate exchange of a single currency for another. The futures market is nearly as straightforward; it is the exchange of a currency for another on a future (predetermined by you) date.
4) Reviewing the trade; this step is critical to ensuring that you haven’t incorrectly entered a currency, amount, or trading date. In most cases, you can change your mind completely and cancel the trade.
5) Running your trade; generally, press the “Enter” key (yes, you can do it!) and accept the trade as it stands.
6) Reviewing the action as it occurs; this will give you the chance to reassess the scenario, and make changes to the terms as appropriate, i.e. taking your profit as it stands or minimizing your loss before it gets worse.
7) Celebrating your winning position; this is probably the easiest step. Licking your wounds isn’t – but that is not a reason to shy away from Forex trading; take it as a lesson well learned, and move on.
With these steps and suggestions in mind you should be able to start on the path to currency trading. Though you’ll want to take time to develop a proper strategy before investing, you can definitely use the steps above for practicing on a demo account before you risk any real money.