Opening a Forex Brokerage Account
Just like in equities market, you first need to open a trading account in forex before you can start trading. It is important to select the right account for you as each one provides different kinds of services. Below is a list of factors to consider to better select your forex account and tips on how to start currency trading:
Leverage provides the means to use your small capital to control a larger amount of capital. Each account has different amounts of leverage, with 50:1 as the most used. That means every $1 in your reading account lets you control $50 in capital.
Leverage provides the opportunity to gain big with the little investment that you have, though it works the same when it comes to loses should your trade move against you.
Commissions and Fees
In forex, all trading is commission free; unlike the brokers from the equity market that has a price per trade. That is the advantage with dealing directly with market makers that don’t need to go through third parties.
Market makers profit from capturing the difference in the spread of two currencies.
When opening an account in forex, it is advisable to open with reputable companies as the forex is largely unregulated. Each accounts offer different fees for their different programs and services, so choose accordingly
How to Trade Forex
There are two ways to trade in forex – first is to buy and sell currency pairs and the second is to buy derivatives that follow the development of a specific pair of currency.
Buying and selling of currency pairs is the most common trading type where you buy a currency pair, hoping that its value rises for you to gain profit out of it, similar to the equities market.
The other type is buying derivatives like futures and options that allow you to buy a currency pair at a given rate before a given time, or create a commitment to purchase the currency at a given point in time.
Types of Orders
Market orders or limit orders allow traders to pen new positions in the market. Market orders allow the purchase of currency at the current exchange rate it is trading in the market. Limit orders provides the ability to specify the entry price for the trader.
Using the take-profit order allow forex traders to close their current position and lock in their profit when their target rate is reached.
Stop-loss orders are used by traders with open positions to prevent any further loss of profit by determining the decline rate of the position before it closes.
These tools and orders seen in the forex are similar to the equities market. By understanding these orders, you minimize risk on your first trade.