The news is rampant with stories of the fall and potential rise of the US Dollar. The Australian dollar is much stronger than the US dollar than it has been for decades. The sovereign debt of some nations has led to relative currency decline. All of these issues pertain to the foreign exchange of currency.
Do you love keeping up with current international events in the political and economic realm? Then you might be a good fit for being a currency trader. Here is how to start…
The Title Fight: Australia vs. USA
Currency trading is not nearly as controversial as a title fight in boxing, but you are essentially pitting two nations against each other.
Here is how it works: Australia has been enjoying a very strong dollar. However, some economists feel that the upside for the dollar is limited and it could be nearing the end of its cycle. The US dollar by comparison has been weak. Economic crisis plus inflation due to quantitative easing has led to US dollar devaluation. But some forecast that the US dollar will continue to rise as the double-dip recession fears have mostly passed.
Over the next few years some forecast the Australian dollar to go down in value when compared against the US dollar. The foreign currency exchange will allow you to convert Australian dollars into US dollars and then convert them back into local currency at a later date for an anticipated net gain.
This is the backbone of currency trading. You take two countries and compare them side by side. Which country is expected to improve its standing and which is expected to relatively decline? You can trade the currency pairs.
Getting Started in FOREX
Set Up a Demo Account. You can set up a practice account to get familiar with the process or some will even fund a few dollars (no deposit bonuses) for you to get your feet wet with real dollars. While there is no substitute for real trading that will give you emotional highs and lows, trading a demo account will give you the practice you need to quickly execute trades and become familiar with the platform. Trading currencies on high leverage can mean big gains and massive losses, so you best know the ropes before your hard earned dollars are at risk.
Understand the Currency Pair Concept. You are trading one currency against the other. Here are a few examples of currency pairs: EUR-USD ; GBP-USD ; USD-JPY and USD-CHF. The first is the commodity and the second is the money used to buy it with. Let me explain… In the EUR-USD pair, you are buying Euros with US dollars. It will always be listed in the amount of dollars of the second currency.
- EUR-USD: How many US dollars does it take to buy one Euro?
- GBP-USD: How many US dollars does it take to buy one Pound?
- USD-JPY: How many Yen does it take to buy one US dollar?
- USD -CHF: How many Swiss Francs does it take to equal one US dollar?
If you are buying a position, you expect the first currency listed to become stronger. If you sell a position first (and buy back later) you expect the second currency listed to become stronger.
Choose Your Currency Pairs and Trade. It will take time and research to look into both countries. You will probably start with short-term positions that are not typically held for days or weeks at a time. Get a feel for the long-term prospects of the two changing economies, but you will also need to follow broker recommendations and timely news for small changes too. Remember, this is a demo account. Make your trade (buy or sell) to speculate on how the first currency will perform against the second (stronger or weaker).
Learn to Use Stop Orders. Stop orders are simple transactions that are activated when prices hit a certain threshold. You can use these orders to automatically liquidate your position as a protection against a loss, or to grab a profit if the pair moves favorably. Stop orders are an important risk management technique and you should learn to use them early on.
Terminology. There is an entire lingo associated with the FOREX market. Try to become familiar with such terms as pips, margin, lots, spot rate, bid and ask, and so on. It’s not that complex but it will be frustrating if you are not clear on what is being said, or how this affects your trade. As an example, a pip is a measurement unit that will be used for commissions, spreads, and profit.
Technical Analysis. When trading short-term, you will no doubt be using a price chart. While there is no end to the subjective forms of technical analysis, try to learn some basic concepts such as support and resistance, moving averages, and Bollinger bands.
Go Live. Once you feel comfortable with your demo account trading, go ahead and get your feet wet with a real live account. You can trade smaller lot sizes, such as a micro-lot. This will allow you to experience the emotions of trading real money while still starting slow.
FOREX WRAP UP
The currency exchange market is one of the most liquid financial markets around the world. It trades around the clock thus giving better hours than the local stock market exchange. This highly leveraged practice of trading currency can be exciting and profitable, but just be sure to take it one step at a time since geared trading can also turn on you.