Become familiar with the fundamentals of the foreign exchange market.
BASE AND QUOTE CURRENCY
Trading foreign exchange entails selling one currency to acquire another. Determine how much quote currency you’ll need to buy one unit of base currency using today’s exchange rate. To “go long” on a currency pair implies to “short” or “sell” the quote currency in favor of the base currency. It would make sense to sell dollars in order to acquire the aforementioned number of British pounds.
When you take a short position, you’re indicating that you wish to buy the quote currency and sell the base currency. That example, you would exchange your British pounds for American dollars.
Your broker will buy quote currency from you in return for base currency at the bid price.
Putting in a bid means that you are willing to sell your quote currency at that price or higher.
If you want to convert some base currency into quote currency, you can do so at the ask price, also known as the offer price.
The ask price is the lowest cost at which you are willing to make a purchase.
The spread is the amount by which the asking price exceeds the current bid price.
What to take into consideration before trading?
First, settle on the currencies you’ll be trading. Estimate the future of the economy. If you think the United States economy is going to keep contracting, which is negative for the dollar, you might wish to sell dollars in exchange for the currency of a country with a healthy economy.
Analyze a nation’s standing in international trade. A country’s ability to export products depends on the availability and demand for those goods. Since the country’s economy will benefit from this trading advantage, the value of its currency will rise.
Think of politics. If the election results in a government that is more economically responsible, the country’s currency will rise. In addition, a country’s currency tends to rise in value if the government reduces restrictions on economic growth.
Study the economy by reading the reports. The value of a country’s currency can be affected by news about the economy, such as reports on the country’s Gross Domestic Product (GDP) or other economic indicators like employment and inflation.
For this reason, it’s smart to think about both offsetting currency risk and calculating the possible profit from entering a different international market as a result of fluctuations in exchange rates.
These are things to look for in a broker before you start trading
- Check out the market with several different brokers.
- Look for a person with at least ten years of experience in the field.
The company’s experience should reassure you that they know what they’re doing and how to take care of their customers. - Verify if the brokerage is supervised by a respected organization.
Feel more confident in your broker’s honesty and openness if he or she freely submits to government oversight.
Some examples of regulatory organizations are: - National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) of the United States of America (CFTC)
- The Financial Conduct Authority of the United Kingdom (FCA)
- Investment and Securities Commission of Australia (ASIC)
- The Federal Banking Commission of Switzerland (SFBC)
- Federal Financial Services Supervisory Authority, Germany (BaFIN)
- Authority of Financial Markets in France (AMF)
- Find out what services the broker provides.
Consider the broker’s client base and market penetration in light of whether or not he or she deals in commodities and stocks separately. - It’s important to read reviews, but you should use caution.
Unscrupulous brokers may post positive ratings on review sites to improve their own profiles.
Though they can help you get a feel for a broker, reviews should be taken with a healthy dose of salt. - See the broker’s online portal.
It needs to have a polished appearance and functional linkages.
Avoid working with a broker whose website has a message like “Coming Soon!” or looks sloppy in any other way. - Each trade should be analyzed for its associated transaction costs.
You should also investigate the fees levied by your financial institution when wiring funds to your foreign exchange account. - Pay attention to the basics.
For this to work, you require honest and open communication, simple financial dealings, and helpful customer service.
Find brokers with solid reputations to invest with.
Conduct a market analysis
Several options are available to you:
To forecast the future direction of a currency, technical analysts look at charts or historical data to see what has happened in the past. Charts are readily available through your broker or through the usage of widely used programs like Metatrader 4. When conducting a fundamental analysis, traders take into account the underlying economic conditions of a country.
Analysis based on an individual’s feelings is called sentiment analysis.
To determine whether the market is “bearish” or “bullish,” one tries to read the tea leaves, so to speak.
You can’t always predict how the market will feel, but you can usually make a good guess that will inform your trades.
Figure out how much of a buffer you have.
The minimum investment and maximum trading size are both determined by your broker’s policies.
To trade 100,000 units at 1% margin, for instance, you’ll need to deposit $1,000 in cash with your broker.
The account value will increase or decrease based on your gains and losses.
That’s why a smart rule of thumb is to put no more than 2% of your cash into any one currency pair.
The order is now being taken.
A variety of orders are available:
For Market Orders:
A market order is a direction to your broker to purchase or sell at the current market price.
You can tell your broker to make a deal at a certain price by using a limit order.
As an illustration, you can set a price target and purchase or sell currencies based on whether or not that price is reached.
Warns to Reverse:
In foreign exchange trading, a stop order is an order to buy currency at a price above the
retail price (in anticipation that its value will increase)
as an alternative to continuing to lose money, you could sell currency at a price lower than the market rate.
Mind your income and expenses.
Don’t let yourself get too attached.
There will be many ups and downs in the foreign exchange market.
What really matters is that you keep digging into the details and sticking to your plan.