Trading Currency Online Guide

Every day, trillions of dollars in currency is traded online. Some of these trades take place between major international banks and governments. Other trades are performed by everyday people like you and me.

Good traders can generate a healthy income for themselves online through foreign exchange (“forex”) trading.

But before you become a good trader, you need to know the basics of online currency trading. With that in mind, here’s everything you need to know about getting started trading currency online.

Learn the Basic Forex Terms

Throughout this guide, we’ll be using terms that you might not understand. Have a quick read through these terms to learn the basics of forex trading:

Base Currency: This is the currency you are spending to buy another currency. It’s the currency you’re getting rid of.

Quote Currency: This is the currency you are buying with your base currency. It’s the currency you want to acquire.

Exchange Rate: This is the current rate of exchange between the quote currency and the base currency. It tells you how much you’d have to spend in quote currency to purchase base currency.

Long Position: Holding a long position means that you want to buy the base currency and then sell the quote currency. You would hold a long position if you think the base currency is about to become more valuable (or the quote currency less valuable).

Short Position: A short position means that you want to buy the quote currency and sell the base currency.

Bid Price: Your broker will list a bid price. This is the price the broker is willing to pay for base currency in exchange for giving you quote currency.

Ask Price: The ask price is the price the broker is willing to sell base currency in exchange for quote currency.

Spread: Spread is the difference between the bid price and the ask price on a particular currency pair.

Step by Step Guide to Launching your Forex Trading Career

Now that you’ve learned the basic terms, it’s time for a step by step guide on how to actually start trading and start (hopefully) making money. Here’s what you need to know:

Step 1) Decide which currency you want to trade

This is probably the hardest part of currency trading. Foreign exchange markets are notoriously unpredictable and governed by a near-infinite number of factors. Some things to take into account when researching currencies to trade include:

— Research Everything: Up above, we talked about how there were a “near-infinite” number of factors governing currency valuations. That’s true, but there are also certain factors that influence currency valuations more than others.

Typically, investors look at 5 different factors as being more important than any other, including:

1) Inflation Rates: Countries with consistently lower inflation rates will typically see a consistent rise in currency value. The purchasing power of that currency increases relative to other currencies because its inflation rate is lower than the currencies held by other countries.

2) Interest Rates: Interest rates, inflation rates, and exchange rates are all closely related. In most countries, the only tool central banks use to influence currency values is to change interest rates. When a central bank offers high interest rates, it can attract foreign capital, which causes the exchange rate to rise. When a central bank offers lower interest rates, it reduces the return on investment, which means the exchange rate will be lower as foreign investment becomes more and more lucrative.

3) Current-Account Deficits: A trade deficit or surplus can have a big impact on the exchange rate. When a country is running a trade deficit, the current account shows the country is spending more on foreign trade imports than it is selling through exports. This will lower the value of the country’s currency because the country needs to borrow capital from foreign sources to make up the deficit. This means there will be a higher demand for foreign currency.

4) Public Debt: Countries with a large amount of public debt tend to have higher inflation. This higher inflation makes the debt cheaper to pay off in terms of real dollars in the future. At the same time, it makes the country’s currency less attractive to foreign investors because they know that currency will gradually lose its value.

5) Terms of Trade: The terms of trade is an expression that indicates how favorably a country’s goods and services are purchased on the international markets. When the price of a country’s exports rises by a greater rate than that of its imports, its terms of trade have favorably improved, which means there’s greater demand for that country’s exports, which then leads to greater demand for that nation’s currency.

— Economic Predictions About The Country: If you think the Canadian economy will weaken in the next 12 months due to some major economic event, then you will want to sell your Canadian dollars. Of course, every time you sell a currency you’re buying another one (that’s why it’s called trading). If you think the Canadian economy is going to become weak, then you should be buying into a country that has a strong economic future.

— Political Predictions About The Country: Elections can frequently change the value of a currency. In general, countries that elect fiscally responsible governments can expect their currencies to rise in value. If the party is perceived as having a fiscally irresponsible view, then the value of the currency might fall.

Read newspapers. Read online blogs. Research political platforms and stay up-to-date on current events. The closer your finger is to the pulse of the global economy, the more informed a trader you’ll be.

Of course, if you don’t want to do your own research, then you can find other people willing to share their own research. Consider subscribing to sites, magazines, or newspapers that track the global economy and provide general guidance about the future of exchange rates.

Step 2) Research Online Brokers

Researching online brokers is another difficult step because there are so many online brokers available online today. Here are some things to consider when researching online brokers:

Experience Always Helps: New online brokers may offer awesome incentives to beginner traders, but they could also refuse to pay you when you need to cash out. If you’re worried about stability, then choose an experienced online broker with at least a decade of history.

Regulation is Always Important: Legitimate online brokers are regulated by governmental organizations. Here are the regulatory bodies to look for in different countries:

— United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)

— Canada: Investment Industry Regulatory Organization of Canada (IIROC)

— Australia: Australian Securities and Investment Commission (ASIC)

— United Kingdom: Financial Conduct Authority (FCA)

— Switzerland: Swiss Federal Banking Commission (SFBC)

— France: Autorité des Marchés Financiers (AMF)

— Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)

There are more governmental oversight organizations than just the ones listed above. Reputable brokers will clearly list this information on their website and trading platform.

Product Diversity: Some online brokers only let you trade in 5-10 currency pairs. Others will let you trade in all major world currencies along with securities and commodities markets, for example. A diversity of products is important for two reasons. First, it shows that the broker has a wider client base and business reach. And second, it helps you take advantage of products in different markets and diversify your investments.

Transaction Costs: Compare transaction costs between forex brokers. Some lower-quality brokers will nickel and dime your forex trades to a point where it’s virtually impossible to make money. Others offer honest and transparent fee structures.

Other Factors: Other things to consider about the broker include customer service and support, a good trading platform for desktop computers and mobile apps, and customer reviews online. In terms of platforms, about 70% of forex brokers use Metatrader 4, so that’s usually a good indication of quality.

Step 3) Open a Demo Account with Play Money

If you’re confident about your investment skills and ability to predict forex markets, then you can jump right into an account with real money. Choose one of the good brokers you found in step 2.

If you’re not confident, then you’ll find plenty of online forex brokers willing to give you a demo account with play money. This can be a good place for beginner investors to start.

In any case, signing up for a forex account typically takes a little bit of work. You may have to submit paperwork and proof of identity, for example.

You may also have to decide whether you want a personal or managed account. With a personal account, you make your own trades. Most people reading this article will want a personal account.

If you want that broker to make currency trades on your behalf, then you can sometimes choose a managed account.

Step 4) Check your Profits

This is the point where you’ll either gain great confidence as a beginner investor or totally lose interest: once you start to calculate your profits after a few basic trades, you can see how successful you were as a trader.

Depending on the volatility of the currencies in which you’re investing, you could start to see significant changes after just a few days of trading. In most cases, however, you’ll need to wait for significant economic shifts to make their way through the market, which can take months – especially if you’re trading stable currencies from developed countries.

Step 5) Open an Account with Real Money

If you’re confident about your trading skills at this point, and are satisfied with your returns in play money, then you should consider opening an account with real money.

First, you need to determine your margin. This margin varies depending on the broker’s policies. If you want to trade 100,000 units at a margin of 1%, for example, then your broker will require you to deposit $1,000 cash in your account as security.

Other things to know about operating an account include different types of orders you can place. Those orders include:

— Market Orders: Market orders let you instruct your broker to execute a trade at the market’s current buy/sell rate.

— Limit Orders: Limit orders involve telling your broker to execute a trade at a specific price. If you only want to sell your currency when it reaches a certain lower limit or upper limit, then you need to place a limit order.

— Stop Order: Stop orders let you buy currency about the current market price or sell currency below the current market price.

Juggling all of these types of orders and timing the market is the key to running a successful forex brokerage account.

Step 5) Continue Analyzing the Markets

Economic analysts typically have three methods of analysis. Use these three methods to continuously monitor the global economic climate and stay constantly informed on your investments:

— Technical Analysis: Review charts, statistics, and historical data to make a technical prediction on the future of the forex market. Past events – and the market’s previous reaction to those events – are often an effective way to predict future movements.

— Fundamental Analysis: Analyze the country’s economic situation, including fundamental data like exchange rates, interest rates, public debt, GDP growth, inflation, etc. to determine the likely future of a country’s currency.

— Sentimental Analysis: Sentimental analysis involves analyzing the mood of the market towards a particular currency pairing. Some people will take a “bearish” view on a currency pairing, which means they believe the pairing will go down over time. Others take a “bullish” view and believe the currency pairing will rise over time. You can make money in both market climates. You can sell short if you think a country’s currency will go down (bearish). You can invest long-term if you think a country’s currency will rise (bullish).

Top 10 Best Tips for Trading Currency Online

— 10) Use demo accounts prior to opening a real forex account. Even if you think you’re an awesome trader, you might be humbled when you check the results of your demo account. It’s better to lose fake money today than real money in the future.

— 9) Remember that just like with all trading, forex trading means a loss isn’t a loss until you close your position, and a profit isn’t a profit until you close your position. In volatile forex markets, patient traders can sometimes be rewarded for investing long-term.

— 8) Realize that 90% of day traders are unsuccessful. Day trading might sound like an awesome professional or side-job, but it’s rare for someone to be a consistently successful day trader. Forex day traders are particularly unique because you have to trade large volumes of currency in order for the minute daily percentage changes to make a difference.

— 7) Analyze currencies on the weekend to avoid short-term reactionary decisions. Currency markets close on the weekends. This gives you a good time to analyze currencies without the distractions of daily movements.

— 6) Investopedia recommends using the following formula to determine your effectiveness as a trader:

Total all your winning trades and divide the answer by the number of winning trades you made to determine your average earnings. If you’ve made lots of trades, just look at your last 10 or 20 trades. If you haven’t made at least 10 trades, look back at your research to determine where you would have entered or exited the market.

— 5) Never let any trade lose more than 2% of your total account value. I you have $10,000 in your trading account, then put a stop order at a loss of $200. Leveraging your trades to a maximum risk of 2% of your total funds protects your account long-term.

— 4) Start your account with a small sum, and then increase the size of your account through organic gains instead of larger deposits. If you’re successful as a forex trader, then your account will naturally grow in size over time. If you’re an unsuccessful trader, then you may be tempted to put greater and greater deposits into your account, which isn’t a good long-term approach to investing.

— 3) Beginners should focus on a single currency pair. There are thousands of details that go into a currency pair’s analysis. All of these details can be difficult for new traders to handle. Focus on a single currency pair and aim to master everything about that pair – including the economic and political news that seems to influence the currency more than others. After mastering that pair, start to expand.

— 2) Avoid online forex scams. Forex scams are found all across the internet. These scams typically lure in beginner traders and claim that anyone can be a millionaire simply by working from home and day trading foreign currencies all day. If that was true, then nobody would work! Avoid the temptation of these snake oil salesmen and try to be as informed as possible about your forex broker.

— 1) Remember, you only need three things to start forex trading:

— A Forex Brokerage Account
— Cash You’re Willing To Invest (and Possibly Lose)
— A Brain You Can Use To Analyze Global Markets And Predict Where Currencies Are Going To Go

If you have those three things, then there’s no reason why you can’t be a successful forex trader and start trading currency online.