In the previous lessons, you learned about the different currencies and currency pairs and how to buy or sell them in the forex market. It’s now time for you to learn how to trade in it.
Lesson Highlights
- Trading forex is relatively straightforward.
- Brokers will require specific personal and financial information before you can set up a trading account.
- There are three types of forex markets you can trade in: spot, forward, and future forex market.
How Do You Trade in Forex?
Trading in forex is pretty straightforward. You only need to sign up with a broker you trust and open an account with them.
If you’re new to trading, you can follow the steps below, and you’ll be ready to start trading in no time.
Step 1: Finding the Right Broker
The first thing you’ll need to do is to look for available brokers that offer foreign exchange (FX) trading accounts.
If you’ve already been trading before and your current broker offers FX trading, you can skip this step and get straight to trading. Otherwise, you should begin by comparing FX brokers and weighing them against a set of relevant criteria.
These criteria can involve:
- Fees
- Platform capabilities
- Margin rates
- Compliance
- Customer support
You can visit broker review and rating sites to help you determine if a broker is right for you.
Step 2: Opening Your Forex Trading Account
Once you’ve found a suitable broker, setting up your account should be quick and easy.
When opening a trading account, brokers typically ask you to provide your personal data, some financial background information, and your tax identification number. Brokers compliant with “Know Your Client” regulations will also ask about your finances and investment goals.
Trading FX often involves leverage—a trading mechanism that lets you control larger market positions with less of your own money. Due to this, opening a forex trading account involves executing margin agreements.
Step 3: Verifying Your Identity
Your broker will use the following to verify your identity:
- Your passport, a license, or your national ID
- A utility bill or bank statement confirming your address
If you’re from the US, you should note that some of the world’s leading forex brokers may not offer you an account.
Step 4: Funding Your Forex Account
With your forex trading account approved, you’ll need to top it up before you can begin to trade.
Depending on the trading platforms your broker offers, you can start trading with as little as USD 100.
Step 5: Researching Currencies and Identifying Trading Opportunities
Once you have successfully opened and funded your account, the next step is choosing the currency pair you want to trade.
It’s advisable to research the currency pair you’ve selected before entering into a trade. There are many techniques you can use to analyze the trends and factors affecting your chosen pair.
These include fundamental, technical, and sentiment analysis or a combination of the three.
Step 6: Sizing Up Your First Trade
Before entering your first trade, you must have a full understanding of how much capital you have. Another factor you should consider is the size of leverage available to you, if any.
Leverage in forex can go as high as 50:1. This means if you have USD 100 in your account, you can open a position worth USD 5,000. Using leverage can give you substantially larger returns but also higher risk levels.
Knowing how much capital you’re willing to risk and how far you’re willing to let the market move against you before taking losses makes up your trade’s parameters.
Alternatively, you can set up take-profit points to systematize your trades and reduce risks.
Once you’ve determined your trade’s parameters, you can enter the order on your broker’s platform.
Step 7: Monitoring and Managing Your Position
By this time, you should have a clear understanding of your position and have established exit points for taking profits or losses on your trade. Using one-cancels-the-other (OCTO) is popular among traders.
Using OCTO, you will automatically take your profit (or losses) upon reaching your pre-determined levels and cancel the other remaining order.
Requirements for Opening a Forex Account
Before you can set up a forex account, you must meet certain requirements and provide certain information.
These requirements include providing your broker with personal details, such as:
- Personal information. The personal data you’ll need to provide will include your full name, birth date, mailing address, phone number, and email.
- ID verification. You will also need to furnish a copy of a government-issued ID, such as your passport or driver’s license.
- Proof of address. This includes utility bills, billing statements, or bank statements showing your full name and confirming your address.
- Financial information. Brokers will sometimes ask for your bank account details to set up your account’s funding through bank transfers.
You will also need to consider the minimum amount you will deposit in your forex trading account. Forex trading accounts can have low minimum deposit requirements, if at all. However, having enough capital in your account will allow you to engage in more substantial trades. More specifically, a larger capital gives you more leverage and a larger trading margin.
Although there are no rules on how much capital you should have, a good rule of thumb is to have at least $2,500.
Types of Forex Markets You Can Trade In
There are different types of forex markets you can trade in, namely, the spot forex, forward forex, and futures forex markets.
These forex market types are discussed below.
Spot Forex Market
Spot FX refers to the exchange of two currencies at the time of trade for a specific exchange rate. When investors participate in spot forex trading, they expect to buy and sell foreign currencies for immediate delivery.
As its name suggests, you're taking advantage of the spot.
The term spot refers to the price of the currency for settlement on the spot date, which is usually two business days after the trade date.
When people talk about the forex market, they usually mean the spot forex market.
Forward Forex Market
The forward forex market involves trading contracts between two parties to exchange a set amount of currencies at a specified future date.
For instance, you enter a forward forex trade with another person for an agreed amount of USD 100 for pounds sterling in two months. Instead of executing the trade at the exchange rate two months into the future, you lock in the current rate of GBP/USD.
Forward FX can help protect (or hedge) you against currency fluctuations. For this reason, it is popular among businesses that regularly make payments in foreign currencies.
It’s important to note that the forward forex market is not standardized and is directly negotiated between the parties involved. Thus, many of the terms in the agreement can be personalized.
Future Forex Market
The future FX market is similar to the forward forex market. The difference between the two is that future FX trades have fixed terms and are done on regulated futures exchanges. The Commodity Futures Trading Commission has regulatory oversight on the activities conducted on these exchanges.
Additionally, trading in the future forex market requires margin deposits from the parties involved to ensure both will fulfill their end of the agreement.
Now that you’ve learned how to trade in the forex market, you can head on to the next lesson, where you’ll learn how to make money from forex trading.
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