Online Forex Trading
Online Forex Trading – What Is It?
Online Forex Trading can make you a lot of money, but along with the rewards comes the risk. Mistakes can be costly, and one bad call can wipe out all your profit in one go. However, there is a lot of advice available online, and the objective of this website is to enable you to use Forex while avoiding the pitfalls.
You will find plenty of advice online on how to do things the right way, but much of this makes too many assumptions about the depth of your knowledge. However, as with any other form of investment, if you ignore the basics then you are on an insecure foundation, so here are some basics of Forex closely followed by advice that will be useful to both beginners and those experienced in using foreign exchange as a source of income.
1. Forex quite simply refers to foreign exchange, and you make money by buying a currency at one price and selling at a higher price. There are ways to do this and minimize your risk, and other ways that maximize risk but also maximize profit.
2. There is no actual market place for Forex, as there are the Stock Exchanges for share dealing. Yet Forex trading runs at about three times the volume of regular share transactions on the stock exchanges and those involved range from professional dealers and the large banking corporations to the small guy sitting in front of his laptop at home.
3. Forex Brokers
· You will need a Forex broker, and most brokers are honest, especially those associated with banks and other financial institutions. Your broker should be registered as a Futures Commission Merchant with the Commodity Futures Trading Commission (CFTC): this gives you security against fraud. Your broker might also be a member of the National Futures Association (NFA), although this is voluntary.
· Check whether or not your choice of broker has a demo account. Most do, and this allows to you do paper trades for a while to let you get used to online Forex trading before you actually risk your capital. Such accounts also allow you to become familiar with the software tools that your broker should provide. If you can’t get software tools AND a demo account, try another broker. You should be able to use paper accounts for up to thirty days to allow you to get used to what the software can and cannot do. If something doesn’t work it is likely you that needs more training before you risk real money.
· On the topic of software tools, good brokers offer you the use of these to help you make transactions. You should be able to purchase some currencies in the morning, and enter the price at which you are prepared to sell it. The software will automatically make the sale at the stated currency exchange rate, and when you next check you might find you have a nice profit in your account!
· Your broker’s website should offer RSS feeds to keep you in touch with current exchange rates and analysis charts, such as profit and loss and exchange rate trends. To make best use of these tools you need broadband and at least Windows XP or similar.
· Make sure that your broker allows telephone trading since you might not always be able to get to a computer when you see an opportunity.
· Most brokers are honest, but keep an eye out for ‘requotes’. That is when you thought you had made a deal at one price, but your broker tells you it was really at another, usually to the broker’s advantage. This can happen genuinely, but keep count because if it happens frequently you should smell a rat and change your broker.
· Keep in mind that individual trading is free of charges. The broker does make money, but through the difference between bid and ask prices known as the spread. This is explained below.
4. The Spread
· In Forex, the ‘spread’ is the difference between the bid price (the price that you can sell at any time) and the ‘ask’ or offered rate (the price that you can buy at any time). In online Forex trading you want a tight spread which means that you can buy and sell with very little difference between prices, whereas with a wide spread you buy higher and sell lower – this makes it difficult to make a profit because the broker’s fee is based on the spread. The wider the spread the greater the fee.
· There are many factors involving the spread and you should make a study of this until you fully understand it. In some cases the spread depends on the depth of book and a large ticket size can mean wider spread. Thus, if your investment is $5 million you could see a wider spread that were it $1 million. Also, some brokers will not deliver the spread being shown, but might deliver a wider spread than that being shown - to their advantage (remember they get paid according the spread). Keep an eye on your broker’s spread policy because it changes from one broker to another.
5. Forex is not easy, and if you are a beginner you will have a lot to learn to avoid making poor investment decisions, so study how Forex works before making any significant currency purchase. Some currencies change hands frequently and others are very rarely traded. Although it might seem like a good deal, there’s little point if nobody will buy the currency. Make good use of paper transactions if you can get them. Sometimes it will be worthwhile registering with another broker just to get the free paper deal to test out some theory you might have.
6. Stated in simple terms, online Forex trading involves knowledge of currency trends, or at least keeping an eye open for them and checking out any factors that could affect the economy of certain countries. This will in turn more than likely affect the value of their currency in the near future and provide you with an investment opportunity.
For example, were the Iraqi political situation to become stable, the Iraqi Dinar would rise considerably in value, and it would make sense to buy Dinar now using the strong Euro, and then sell when they shoot up in value for dollars. The weakness of the dollar might then provide you with a very good income should it gain in strength. On the other hand it might continue to fall!
Online Forex trading is a complex way to make money, and you can also lose it very quickly through ignorance. However, it is a fascinating subject, and if you take the time to learn what you are doing it could provide you with real money-making opportunities.
