Trading foreign exchange in the currency market, also known as forex/forex trading, can be an exciting hobby and a lucrative source of investment income. Just imagine, the securities market trades around $22.4 billion (Rp.286 trillion) per day; while the forex market trades around $5 trillion (Rp.63,975 quadrillion) per day. You can make a lot of money without using too much capital in your initial investment, and predicting the direction of the market movement is really exciting. You can trade forex online in several ways:
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Part 1 of 3: Learning the Fundamentals of Forex Trading
Step 1. Understand the basic terminology
- The type of currency you issue or sell is the base currency, or base currency. The currency you are buying is the quote currency, or quote currency. In forex trading, you sell one type of currency to buy another.
- The rate, or exchange rate, tells you how much of the quote currency you have to spend to buy the base currency. For example, if you want to buy U. S. Dollars. using the British pound, you might see an exchange rate like this: GBP/USD=1,589. This means you have to spend 1,589 Dollars for 1 Poundsterling.
- A long position means that you want to buy the base currency and sell the quote currency. In the example above, you want to sell U. S. Dollars. to buy British Pounds.
- A short position means that you want to buy the quote currency and sell the base currency. In other words, you would sell British Pounds and buy US Dollars.
- The bid price is the price at which your broker is willing to buy the base currency in exchange for the quote currency. Bid is the best price at which you are willing to sell your bid currency in the market.
- The ask price, or bid price, is the price at which your broker will sell the base currency in exchange for the quote currency. This price is the best price you are willing to buy from the market.
- A spread is the difference between the bid price and the ask price.
Step 2. Read forex quotes/forex quotes
You will see 2 numbers on this quote: the bid price on the left and the ask price on the right.
Step 3. Decide what currency you want to buy and sell
- Make predictions about the economy. If you believe that the U. S. economy will continue to weaken, thus adversely affecting the U. S. Dollar, you may want to sell the Dollars in exchange for the currency of a country with a strong economy.
- View a country's trading position. If a country has a lot of goods that are in high demand, then the country is likely to export a lot of goods to make money. The profits from this trade will boost the country's economy, thereby increasing the value of its currency.
- Consider politics. When a country is holding an election, the country's currency will be appreciated if the winner of the election has a responsible fiscal agenda. In addition, if the government of a country loosens regulations for the sake of economic growth, the value of its currency may also rise.
- Read economic reports. For example, a report on a country's GDP, or a report on other economic factors such as employment and inflation, will have an impact on the value of that country's currency.
Step 4. Learn how to calculate profit
- A pip measures the change in value between 2 currencies. Usually 1 pip is equivalent to 0.0001 change in value. For example, if your EUR/USD trade moves from 1.546 to 1.547, the value of your currency increases by 10 pips.
- Multiply the number of pips changed in your account by the rate. This calculation will tell you how much your account value has increased or decreased.
Part 2 of 3: Opening an Account with an Online Forex Broker
Step 1. Research various forex brokers
Consider the following factors when choosing a broker:
- Choose a company that has been in the forex industry for more than 10 years. Experience has shown that these companies know what they are doing and know how to care for clients.
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Check if the broker is regulated by a regulatory body. When your broker follows government oversight voluntarily, you can rest assured of the honesty and transparency of your broker. Examples of some regulatory bodies are:
- United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
- UK: Financial Conduct Authority (FCA)
- Australia: Australian Securities and Investment Commission (ASIC)
- Switzerland: Swiss Federal Banking Commission (SFBC)
- Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
- France: Autorité des Marchés Financiers (AMF)
- See how many products the broker offers. If the broker also trades securities and commodities, then you know that the broker has a larger client base and a wider range of business.
- Read the reviews, but be careful. Sometimes rogue brokers will visit review sites and write reviews to improve their reputation. Reviews can give you a bit of an idea about a broker, but you shouldn't take it for granted.
- Visit the broker's page. Pages must look professional and links must be active. When the page says "Coming Soon!" or does not look professional, stay away from the broker.
- Check transaction fees for each trade. You should also check how much your bank charges for transferring money to your foreign exchange account.
- Focus on the things that matter. You need great customer service, easy transactions, and transparency. You should also choose a broker with a good reputation.
Step 2. Ask for information about opening an account
You can open a personal account or choose a managed account. With a personal account, you can run your own trades. With a managed account, your broker will execute the trades for you.
Step 3. Fill in the required documents
You can request that the document be sent by post or download it, usually as a PDF file. Make sure you check the fees for transferring money from your bank account to your broker's account. These fees can reduce your profit.
Step 4. Activate your account
Usually, the broker will send you an email containing a link to activate your account. Click on the link and follow the prompts to start trading.
Part 3 of 3: Starting Trading
Step 1. Analyze the market
You could try a few different ways to do this:
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Technical analysis:
In technical analysis, you review charts or historical data to predict currency movements based on past events. You can get charts from your broker or use a popular platform like Metatrader 4.
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Fundamental analysis:
In this analysis, you observe a country's economic fundamentals and use this information to influence your trading decisions.
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Sentiment analysis:
This analysis is very subjective. Basically, you're trying to analyze the "mood" of the market to see if it's "bearish" (down) or "bullish" (up). While you can't always be sure of market sentiment, you can often make good guesses that will affect your trades.
Step 2. Determine your margins
Depending on your broker's policies, you can make big trades by investing very little money.
- For example, if you want to trade 100,000 units with a margin of 1 percent, the broker will require you to deposit $1,000 in your account as collateral.
- Your profits and losses will increase or decrease the value of your account. Therefore, the general recommendation is to invest only 2 percent of your money in certain currency pairs.
Step 3. Place your order
You can place different types of orders:
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Market orders/market orders:
With a market order, you instruct your broker to buy/sell at the current market price.
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Limit orders/limit orders:
This order instructs your broker to execute a trade at a specific price. For example, you can buy a currency when it reaches a certain price or sell it when it drops to a certain price.
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Stop orders/stop orders:
A stop order is an option to buy a currency above the current market price (with the expectation that its value will increase) or sell a currency below the current market price to stop your losses.
Step 4. Observe your profit and loss
Most importantly, don't get emotional. The forex market is always volatile, and you will see a lot of ups and downs. The important thing is to keep doing your research and stick to your strategy. In the end, you will see the profit.
Tips
- Start trading forex with a demo account before you invest real capital. That way, you can get an idea of the process and decide if forex trading is right for you. If you continue to make good trades with a demo account, you can start with a real forex account.
- If your currency pair is not profitable for you and you do not have enough money to run its duration, your order will be canceled automatically. Make sure this doesn't happen.
- Try to focus on using only 2% of your total cash. For example, if you decide to invest $1000 (approximately $1000), try to invest only $20 in a currency pair. Prices in forex are very volatile, and you want to make sure you have enough money to cover losses.
- Remember that the loss is not real until your position is closed. If your position is still open, the loss will only be calculated if you choose to close the order and realize the loss.
- Limit your losses. Suppose you invest $20 (approximately IDR 250,000, -) in EUR/USD, and today your total loss is $5 (approximately IDR 60,000, -), then you will not lose any money. It is important to use only 2% of your funds for each trade, and combine stop-loss orders with that 2%. Having sufficient capital to cover losses will allow you to keep your position open and earn profits. Over the downside will allow you to keep your position open and see profits.
Warning
- Ninety percent of day traders are unsuccessful. If you want to learn common mistakes to avoid losing trades, consult a trusted financial manager.
- Make sure your broker has a physical address. If the broker doesn't provide an address, you should find another broker to avoid scams.
