Now, thanks to the internet, forex trading has become mainstream and accessible by regular investors. If you’re new to forex here are the basics.
Forex Trading Basics
The forex market works very different than the stock market. Instead of choosing stocks of companies you’re choosing currencies from other countries. Currencies are listed in pairs and sold against each other – meaning you use one currency (like the USD, for example) to buy another currency.
If you saw EUR/USD at 1.10 that would mean it would cost you $1.10 to purchase one Euro. When you buy one currency you’re essentially selling the other.
The object of Forex trading is to try and predict which currencies will increase in value and which will decrease. Based on your research you would trade to your advantage to try and make a profit.
Forex trading is speculative in nature and to be a good trader you need to have knowledge of the economies in other parts of the world. However, even though Forex carries risk it does have its advantages – you can both earn the interest between the two currencies and the currency you purchased could go up in value as well. (On the other hand it could also move the opposite direction.)
You Don’t Need A Lot of Money to Start
One appealing aspect to prospective Forex traders is that you don’t need a lot of money to start. In fact, some Forex brokers will offer leverage of up to 200:1. That means if you deposited $1,000 into your account you could potentially trade $200,000 in currency.
Seems risky right? Well, one of the reasons brokerages offer this much leverage in the Forex market is because exchange rates do not fluctuate like stocks do. That doesn’t mean that leverage is completely safe though.
Leverage can definitely be a high risk high reward situation and you could end up losing all of your initial investment or more. Leverage should be used very carefully and not until you have a good understanding of what you’re doing. (This is why I’d recommend playing around with a demo account before opening a live account.)
How You Would Get Started
If you’re interested in trading forex, getting started is actually pretty simple. Simply up with a forex brokerage like CMC Markets, gain some experience by participating in demos and educating yourself as much as possible, and then place money in your margin account to get started.
It is definitely possible to earn money trading currencies against each other. Just keep in mind that as easy it is to earn money it’s just as easy to lose money and that leverage should be used responsibly. To be a successful forex trader you need to have some understanding of the economies in other countries.