The forex (foreign exchange) market seems very opaque to the beginner trader, yet it offers many opportunities to make money. To begin trading forex, you must know how the forex market works as well as how successful forex traders achieve success in the markets.
Among the unique features of the forex market is that it trades 24 hours a day. Unlike stocks, which are limited to national exchanges, currencies are traded on exchanges all around the world. This means that you can trade at all hours of the day.
In addition, there are many currency pairs you can trade to make money, such as:
- USD/JPY – Buying this pair means going long the US Dollar, and going short the Japanese Yen.
- GBP/USD – Buying this pair means going long the British Pound and going short the US Dollar.
- CNY/USD – Buying this pair means going long the Chinese Yuan and going short the US Dollar.
There are countless other currency pairs you can trade. In addition, the forex market has tremendous liquidity, which makes it suitable for large institutional investors looking to take gigantic positions.
How to Open a Brokerage Account for Trading Forex
To begin trading forex in the US, you need to open an account with a registered forex broker. There are many brokers to choose from. They vary based on their reputation in the market, the size of the brokerage firm, as well as the trading conditions they give you.
For example, you will want to compare the margin requirements and leverage conditions that different brokers give. Some forex brokers will give you leverage of as much as 500:1 while others will only allow leverage of 50:1.
A high leverage such as 500:1 means you can control up to $500 of trade position for every $1 of margin you deposit in your account. This is attractive since leverage can make your successful trades more profitable. You should be careful with leverage, however, because a small move against your position can wipe out your margin entirely and lose you trading capital.
Basic Strategies for Trading Forex
A good beginner’s approach in the forex market is to select a winning strategy and master it. What you should not do is deploy a random mix of strategies, or, even worse, trade with no strategy at all.
The following are some strategies that are beginner-friendly.
- Forex Breakout Strategy – With this strategy, you follow a consolidation pattern and then look out for a breakout in the price on the upside (to go long) or the downside (for going short).
- Stochastic High Low Strategy – Here, you look for a short-term top or bottom in the Stochastic Indicator to trade in the direction of a reversal.
It is important to know that different strategies will work unevenly for different traders. Largely, it comes down to choosing a strategy that you can work well with based on your personality type and trading discipline. In general, the more disciplined you are with implementing a profitable strategy, the more money you will make in the forex markets.
Backtesting Your Strategy With Free Forex Historical Data
You won’t really know whether your chosen strategy is a winning strategy or not until you have back-tested it properly. In forex trading, backtesting means running your strategy on historical forex data covering a considerable period of real-world trading events.
Popular time spans for backtesting include 10 years, 30 years, and 50 years. To get historical forex data, you can either buy it from research firms or scrap together free data from providers like Yahoo Finance.
Learning From Successful Forex Traders
Some of the most successful American forex traders include individuals like George Soros, Bruce Kovner, and Andrew Krieger. Soros is famous for helping break the British Pound in 1992. You can learn from such successful traders by studying their strategies and implementing them yourself.
One under-appreciated learning avenue is to consult your library or bookstore for currency trading books by successful individuals. Many of the most successful currency traders have written books to serve as a guide to future generations and beginner forex traders.
Trading Binary Forex Options
As you become more advanced in your forex trading, the time may come for you to consider stepping into the forex options arena. Trading forex options come with even more volatility and leverage than trading the underlying currencies. As with most things in the financial markets, this presents significant upside as well as great risk.
You should always err on the side of caution in order to preserve trading capital. Sticking to fundamentals, like the use of stop losses and getting out of bad positions, will give you the best chances for long-term success.
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