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Beginners Guide - How to Begin Trading the Forex Market

written by: Steve McFarlane•edited by: Laurie Patsalides•updated: 9/10/2011

The forex market is dynamic and every changing and to the knowledgeable and ambitious day trader, it is an irresistible investment option. However, there is some training that every new trader needs to have before beginning to trade Forex with profitability; let's take a look at those things.

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    The foreign exchange market is a decentralized worldwide over-the-counter financial market through which currencies are traded. The forex market serves a wide range of buyers and sellers who trade trillions of dollars on a daily basis, with the exception of weekends. Up until the 1990’s the forex market was closed to all but institutions and individuals with deep pockets. It is only in recent times that Forex brokers have made the market open to small retail traders, who can now trade the market with as little as US$1.

    Many traders have been drawn to the forex market by the prospect of making large sums of money from a very meager starting capital. While it is true that forex traders can make a lot of profit, the reality is that a new trader is unlikely to become profitable unless he or she is prepared for the whirlwind of dynamics that comes with forex trading. Here are some simple steps for starting to trade forex the right way.

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    Learn the Basic Forex Terms and Concepts

    Forex traders must be familiar with basic terms and concepts such as: pips, spread, trailing stop loss, margin call, lot size, leverage and the carry trade. Google these terms or explore the education section of a dedicated currency trading website such as Fxstreet.com or Fxcm.com.

    Choose Your Forex Broker Well

    A forex broker will be your link to the markets and therefore they can significantly affect your trading profitability, base on their margin call policies and currency rate spreads among other things. If a broker has a higher minimum deposit requirement that you can meet or if they don’t have the charting package that you need to execute your trading strategy, don’t waste your time doing more research on them; look for another broker.

    Similarly, it is always a good idea to check that a prospective broker is registered with a regulating organization before you send them your money. Think twice if the broker you are considering is not registered with a regulating authority such as the National Futures Association (NFA), the Commodity Futures Trading Commission (CFTC) or the Financial Service Authority (FSA).

    Whether or not a broker offers the currency pairs you are looking to trade is a major issue, but considering smaller matters such as whether or not they accept credit card and Paypal deposits or offer mobile trading are important as well. These might not be deal breakers in and of themselves, but it can be so convenient to get all you want in one place.

    Open a Demo Account and Buy a Forex Simulator

    Before you commit your hard earned money to trading, you must take the time to learn how the market works and become familiar with the characteristics of the currency pairs you are planning to trade. Demo accounts allow a trader to enter and exit trades just as he or she would in live market conditions, without risking real money. Trading a demo account is also a good way for a forex trader to become familiar with the features of the trading platform while he or she develops and tests new trading strategies.

    However, there is another class of forex training tools called forex simulators that can greatly assist a new forex trader. Forex simulators are different from demo accounts in that they can be used to trade the same price action repeatedly. Simulators can be used to trade past market action as if they were happening in the present. The ability to pause and rewind the trading charts, based on real historical price actions, gives the trader an excellent tool to gather a lot of practice in a short period of time. On the other hand, traders of standard demo accounts must wait for a longer period of time to see what will happen to their trades.

    Fund Your Trade Account

    It could take up to a year or more to really get the hang of trading the forex market, so don’t be too hasty to get started; take the time to practice before you make the plunge. When you have decided that you are ready, you can deposit money into your live trading account, as per the instructions of your broker. Some brokers now allow the use of credit cards, Paypal and money orders to deposit funds into a trading accounts and nearly all will take wire transfers. The minimum you will need to fund your account can be as low as $1 or be well over $5,000, again this depends on your broker.

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    Summary

    Even after you have gotten a handle on trading the forex market and you have become comfortable and competent, you still have work to do. The forex market is dynamic and ever changing, so you must keep abreast of the new developments in the economy, on the political scene and also on the technical analysis of the currency pairs that you are trading. You should read widely and be aware of the trading positions and insights of forex trading professionals. These persons can reveal interesting perspectives that you would otherwise be unaware of.

    It is often said that practice makes perfect but while no trading strategy can every be perfect, frequent practice and back testing can go a long way to improve the competence of any trader. The frequent review of trading records is also a staple in the routine of successful traders.

    For more tips and strategies, be sure to check out the other items in Bright Hub's Collection of Forex Trading Guides.