An estimated $3trn in daily trades makes forex the largest market in the world. You can buy and sell currencies 24 hours a day and seven days a week, but how do you get started?
Everyone is talking about trading forex but if you’ve never done it before, how do you get started?
Here is the YMM guide to the basics of currency trading.
1. Reasons to trade
In late 2008 the Aussie dollar was at around US$0.63. Less than a year later it was up at around US$0.93. If you’d bought and sold at the right time you would have made a huge 50% annual return. Or you could have held on, watched the Aussie dollar surge past parity to push US$1.10 and sold in mid-2011 for a total 75% gain. Clearly you can make a lot of money by trading foreign exchange (forex).
Any ups and downs in the exchange rate between currencies represent a chance to make good money, as long as you do your homework on stay on top of the many factors that influence exchange rates.
Forex trading is like a two-horse race that never ends. You bet on the movements of one currency against another.
2. How you should trade
As a private trader, your options are to trade through a currency broker online or move money between bank accounts.
Trading online: You can use an online broker who provides an account equipped with an electronic platform for placing trades. The most popular platform software is called MetaTrader4 and is offered by hundreds of brokers worldwide. Once you set up an account you can buy and sell currencies against each other. The broker makes a bit of commission from every trade you place, regardless of whether or not you make money from it. Most online platforms also provide a wide array of features, research and data to enable you to make better trading decisions.
Brokers don’t charge you set-up or ongoing fees. They make their money by buying currency at a slightly lower rate than you pay for it.
To begin trading you will need a minimum of $10 to $100, depending on which online broker you opt for. Trading forex through an online broker also gives you access to leverage – that is, borrowing money to buy currency. This means that with just a small amount in your account, you can get higher potential returns (and, of course, higher potential losses).
Using bank accounts: The simplest way to trade currency is to operate bank accounts (either Australia-based or overseas-based denominated in different currencies). For example, you hold Aussie dollars in an Aussie dollar account and US dollars in a US dollar account. If you think the Aussie is going up, you transfer some US dollars into Aussie dollars and hold them in your Aussie account. Banks often offer a multi-currency account – that is, one account in which you can hold several different currencies – to make this easier. Trades cost up to $2.50 per transaction. To move money between accounts, a telegraphic transfer will cost you $15-$30. Using bank accounts is not as popular as online trading because you don’t get access to leverage. You need a substantial investment to make a significant profit.
3. Strategies for success
Once you’ve decided how you’re going to trade, you then need to decide what currencies you’re going to trade and come to an opinion about what direction they’re going to move in.
The most popular system for picking currency movements is to use charts of how the exchange rate has moved in the past to anticipate a rise or fall in the future. This is among the most reliable and sensible approaches.
You can take one of two positions on a currency: long or short.
Going long on a currency means you buy it, believing it will rise in value and can be sold off later for a profit.
Going short on a currency means you sell it, believing it will fall in value and can be bought back cheaper later for a profit.
All foreign exchange trading is done in pairs, so when you take a long position on one currency you are always short on another.
-- By Jackie Pearson