How to Start Trading Forex Online: a Step-by-Step Guide

How Should You Begin?

The capital markets are vast, and the forex market is the largest and most liquid. Successful trading or investing is the process of buying a security at a lower price than when you sell it. That’s it — but that process is easier said than done. There are millions of people trying to do the same thing and it’s not easy. As mentioned above, to be successful you need to learn as much as you can about the forex market before you even begin.

What is the Forex Market?

The forex market has been around for hundreds of years, but it’s only been in the last four decades that liquidity has increased, and access has been expanded. In 1971, the gold standard was disbanded, and currencies began to float. The dollar quickly became the global benchmark and it still stands that way today.

Major currencies, such as the euro and the yen, the pound and the Swiss franc, along with the Canadian dollar and the Australian dollar make up the bulk of the global transactions that take place. When currencies are traded and neither currency is the dollar, the pair is referred to as a cross currency. Most of the trading that takes place is called spot trading which requires delivery within two business days. Millions of transactions that take place are in the forward market where traders can hold positions for days, weeks, months or even years.

What is a Currency Pair?

The forex market is the world’s largest marketplace. The style is an auction where the highest bids receive offers. When you transact a currency trade, you are swapping one currency for another at an agreed exchange rate. Currency exchange rates fluctuate constantly with market sentiment.

When you trade a currency pair, you are buying one currency and simultaneously selling another currency. This means that you are short a currency, speculating that the currency you are long will outperform the one you are short. If you hold your currency pair for more than two business days, you will need to incorporate the forward market.

Who are the Players?

The biggest players on the street participate in the interbank market. These are banks and investment banks that have an international presence. Many of these interbank participants have customers such as hedge funds, pension funds, and mutual funds. They also cater to some Fortune 500 corporations, as well as insurance companies. There is a third sector which is the retail market. There are hundreds of brokers that provide direct access to the currency markets.

What Types of Instruments are Available?

When you trade forex online, you have a choice of several instruments. These include currency futures, currency ETFs, currency CFDs and over-the-counter currency trades. Each instrument is regulated differently and prior to transacting, you should become very familiar with any protections you have from regulators.

Determining the Future Direction of a Currency Pair

Determining the future direction of a currency pair requires a strategy. The best you can do is to determine if your strategy worked in the past and then forward test it without risking your capital. You can paper trade where you keep track of your trades on a spreadsheet or piece of paper, or you can use a demonstration account.

You can learn about different strategies from videos or articles. If a strategy appears too good to be true, it is.  What you want to learn is the basis for why markets move. There are two general ways to think about this. The first is that when there is new information, the markets will adjust to incorporate that new information. When there is no new information, all the current news is priced in and the markets will ebb and flow in technical patterns.

There are dozens of different patterns. Prices move toward support and resistance levels, as momentum rises and falls. Most of the time, the markets are range bound and then new information appears creating a temporary trend until consolidation reappears. It’s helpful to perform fundamental analysis on your own, which you can also see online. Many brokers and reputable financial news outlets provide financial calendars that follow economic data.

Technical Analysis

You can find dozens of articles and videos on technical analysis. This is the study of past price action and will help you determine if the market is poised for a change in direction. You can also create a systematic approach using technical analysis tools and backtest the criteria to determine if your strategy would have worked in the past. These automated systems take some of the emotion out of trading the forex markets.

Risk Management

You can also learn about managing your risk online. This is the most important component of your online trading strategy. Before you risk any capital, you need to determine how much you are willing to risk on a strategy before you are willing to say that it does not work. Risk management filters down to each individual trade.

Summary

There are several steps involved in learning how to trade forex online. You need to learn about the market and the different types of securities you can trade. The next step is to create a strategy which is like a business plan.  You also need to establish your risk management, and lastly, you need to find a broker than will allow you to execute your trades. Before starting any trading, it’s highly recommended that you learn as much as you can about the industry.

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