The Beginners Cheat Sheet For Getting Started In Forex

getting started in forex tradingAs readers of my blog know, I am all about passive investing. When it comes to putting money away for the long-term, a good plan is needed that includes low cost investments. But even with my main investment accounts invested this way, I still have an investment account where I buy individual stocks and play around.

My success in playing around is what I would call average. I’ve owned some stocks that have had nice, big returns and others that did nothing but drop like a rock. I’ve even ridden a few into bankruptcy, falling victim to the hope that one day, the stock price will come back.

I credit my “play” account with giving me the success that I experience with the stock market. My “play” account allows me to trade stocks and take chances with my money, most of which never pay off.

In other words, my “play” account is funded with money I am comfortable losing. The goal of course is to make money, but I’m no Warren Buffett.

When it comes to my regular, long-term investing, I stay the course and have seen great success because I don’t try to time the market or chase returns. My play account has shown me that I am much better off in the long run by using a buy and hold approach as opposed to a trading approach.

Getting Started In Forex Trading

Over the past few years, one of the areas of trading I have tried out is the world of Forex trading. Forex trading is simply the trading of currencies. I was introduced to Forex trading in my graduate international finance course.

My professor gave us all $100,000 (in play money, not real money!) and access to a Forex account at the beginning of the semester. We would trade in the account as we saw fit throughout the semester. At the end of the semester, we would present our experience to the class and see who did the best.

Up until this point, I knew what Forex was, but I never used currencies as an investment.

The goal of this exercise wasn’t to have the biggest account balance, but to see what everyone learned. Some made a gamble early on and never recovered. Others, including me, took a more practical approach.

At the time, the Greek debt crisis was in overdrive. As a result, I was shorting the Euro and buying up just about every other countries currency. I did fairly well for myself and was happy about it.

It was very interesting getting started in Forex trading. It made me to look at the news in a different way. Before, I would just read the news. But when trading currencies, I would read stories with the thought of “I wonder how this impacts the currency between two countries” in the back of my mind.

When I started trading, it was easy to see when bad news was coming out of Europe, I was able to short the Euro against the US Dollar. As time went on, I realized that more money could be made trading currencies other than the US Dollar and the Euro and I began to trade in other currencies.

When the course ended, I turned my $100,000 into $120,000. Others in my class had done the same. One classmate lost almost everything because his first trade was for a large amount of money and he didn’t fully understand how things worked yet.

Because of this, it’s important that you understand what you are doing. Below is some more information about Forex trading to help you better understand how it works and what to look out for.

How Does Forex Trading Work?

Forex is the use of trading currency pairs. The most common is EUR/US, or Euros and United States Dollars.

Other common pairs include:

  • Great British Pounds/United States Dollar
  • Canadian Dollar/United States Dollar
  • Japanese Yen/United States Dollar

Of course, you can trade almost any currency you want. When trading pairs, you either buy a currency you think is going to rise in value or you sell a currency you think is going to fall in value.

As I mentioned above, when I was trading during my finance course above, the Greek Debt Crisis was in full effect. This was putting tremendous downward pressure on the Euro, so I was selling that currency and buying US Dollars and even Australian Dollars.

What Are The Benefits of Forex Trading?

The overall goal of Forex trading is to make money. But there are many benefits to trading currency over the traditional stock market. Some of these include:

  • Liquidity: The Forex market is the largest in the world, so it is very liquid. This means it is easy to get your money into the market and out of the market.
  • 24 Hour Trading Day: The Forex market trades 24 hours a day. This is nice for those that work during the day because they can still trade Forex at night or first thing in the morning before they head out to work.
  • Leverage: This is nice because it allows you to make larger trades than you have money for. This means that if you have $100 in your account, you could theoretically trade up to $1,000 at a time. This allows you to really make sizable gains.
  • Low Costs: When trading Forex, your only cost is the spread, which is the difference between the bid and ask prices. There are rarely ever added commissions to the trade like when trading stocks.

What Are The Drawbacks of Forex Trading?

Of course, there are drawbacks to Forex trading. The main ones include:

  • Leverage: While it is nice to use leverage to your advantage to increase the size of your gains, if you invest wrong, you could be in trouble. Think about having $100 but having to pay $2,000. Ouch.
  • Learning Curve: With Forex, you need to understand the terminology and how the system works if you want to succeed. Because of the learning curve, many Forex brokers offer a free demo account for you to practice with so you can get your feet wet. You can read more about this below.
  • Fast Paced: With traditional investing, you can buy and hold for the long term and come out fine in the long run. Not so with Forex. You have to stay on top of the news throughout the world because things happen fast and any delay can cost you your investment.
  • Regulation: The Forex market is not as regulated as the stock market. Because of this, there are some scammers out there. What this means is that when you invest in stocks or ETFs with Motif Investing or Schwab, you know you are dealing with a firm you can trust and rely on. This isn’t the case with firms that trade Forex. Make sure you research any firm you plan to trade with and understand how they are regulated.

Understand The Terminology Used

Terminology is important when getting started in Forex trading and how things work. One misconception can cost you thousands of dollars. If definitions and financial terminology are not your strong suit, keep a cheat sheet close by.

List of common terminology with brief explanations:

  • PIP: In short, PIP denotes the smallest incremental move an exchange rate can make.
  • Leverage: Used to increase buying power, leverage allows you to trade one dollar as if it were fifty.
  • Margin: This is the amount of credit a broker will extend to you as a trader for use as leverage.
  • Margin Call: If the markets begin to drop, the broker may make a margin call. This means you will have to return any money you have traded on margin with them.
  • Spread: A simple term to understand, a spread is the difference between the bid and offer (ask) prices3
  • Bid: The price at which a buyer is prepared to purchase.
  • Offer (Ask): The price at which a seller is prepared to sell.
  • Long: Going long means that a trader buys a currency with the expectations of it profiting well over a period of time, usually a week or longer.
  • Short: This is a quick purchase that is sold with a small rise in price to gain a bit of revenue. This is done with the expectation of the commodity to decline rapidly to help the price per share to regain value.

It is best to keep this terminology handy. You should also clearly understand what these terms mean in order to avoid a financial loss. If you want to understand more terms related to Forex, check out this in-depth guide.

Being Wary Of Costly eBooks and Courses

As in any industry, there will be people who wish to profit from their knowledge. When new traders enter the markets they are at their most vulnerable, which can make them susceptible to costly products.

If it seems too good to be true then it probably is. It’s always worth remembering that there is a wealth of information available for free online and in most instances it’s a lot more useful than expensive online courses or eBooks.

A number of these offers, although not all, are selling a dream as opposed to the information they claim. There is no easy route to success. Financial trading demands dedication and patience.

Knowing When To Trade And When Not To Trade

While there is an element of risk involved in any form of trading, you won’t be taking huge risks on a daily basis. In fact, you are required to exercise patience just as much as you are risk. The most successful traders don’t trade on a daily basis and when the risk is high they sometimes opt to only place small trades. Of course, the reverse is also true.

You’re best strategy at first is to take advantage of the free demo accounts the brokers offer and fully understand the terminology. Once you feel more comfortable, then you can start trading for real.

But don’t get too full of yourself. Take things slow and always continue to learn.

Final Thoughts

I don’t trade in Forex as much as I did after that class. Getting started in Forex trading takes some time and education. Working a full-time job, writing for a few blogs and hanging out with friends hasn’t left me with enough free time that I would want in order to be successful at Forex trading.

I would suggest to others that have some free time to look into trading in Forex in their “play” account. As I pointed out above, it helps you to think and see the news in different ways and can be a fun, new way to trade.

13 thoughts on “The Beginners Cheat Sheet For Getting Started In Forex”

  1. Good post! I’ve always wanted to do some Forex trading, but just have not had the time to devote to it like it deserved. I do have some knowledge on it, but would want to education myself more so I can make better informed investment decisions.

  2. I’ve seen a few posts about this topic recently. I feel like I’m learning more about what’s involved, but wouldn’t actually do Forex trading myself (not enough education about how to make good trading decisions, and I’d be too nervous I’d be like your classmate and lose all my money).

    1. You can always find mock trading sites that let you make trades with fake money to get a better handle on Forex.

  3. Forex is a monster from a psychological perspective. I’ve tried it before with real money, but stopped after a few weeks because I simply couldn’t handle the mental aspects of trading forex. I’ve kept my finger on the pulse of the markets though and have continued learning over the past several years. I’m thinking of re-entering the forex world soon, but will definitely start with a demo account to test my theories and see if I can make money first. In forex I think it is very important to have a system that you trust implicitly, otherwise you will inevitably close trades too early.

  4. I have a couple of colleagues who have done Forex trading for years. They say, that learning the basics and making money are quite simple but the challenge lies in staying disciplined and having the stomach to lose money. It’s as much a mental challenge as anything. I will definitely look into this later this year.

  5. Shawn @ Forex news

    As far as I remember, my friend got me involved into forex trading. He was the one who was into forex trading for some time and was making good money out of it. Then he told me about it and made me learn it properly and guided me properly and made me able to earn really good money with the forex trading. I think EUR and USD pair currencies are main currencies in forex market. U.S. Dollar is involved in 90% of currency trades on a daily basis; the Euro is also involved in roughly 40% of daily currency trading volume. I am confidences with EUR/USD.

  6. Forex trading is so uneblievely risky, especially as a short term solution to make money!! Personally I would stay clear of it due to the risk involved!!

  7. Have to agree with Mary on this one – forex trading is a very high-risk investment on the retail side. It’s hard to make money without having a lot of capital to begin with unless you use leverage… only problem is if you use max leverage even changes from bid to ask can get you margin called. Not fun.

  8. Unlike some of the others above I wouldn’t say Forex is inherently more risky than other types of investing or trading. It’s only as risky as you make it through your rules and planning.

    I’ve traded Forex professionally for almost a decade and I’ve seen the effects of over-leveraging a number of times from various traders. If you are properly managing your risk, however, leverage can actually be very beneficial because of the flexibility it gives you with tying up your money.

    So if you do decide to go the Forex route then you better study extensively, make a trading plan, demo trade it for a few months, and only then even consider going live. The people who rush the process or get greedy and over-leverage are the ones who fail, and more often than not give their money to guys like me.

  9. Paul D. Mitchell

    Forex trading can be done by opening a trading account with any of the Forex brokers. Many big companies like Geojit etc are offering this facility.
    You are looking to transfer money to a foreign bank. This depends on the bank with which you have opened the account. Wired transfer facility can be used to do this. You can specify the account to which you want to transfer the amount. Bank will charge a nominal amount to transfer your amount.
    Regards
    Paul D. Mitchell
    QROPS Malta

  10. Thanks for the informative post. Picking the right option out of several forex trading accounts can go a long way in helping you succeed. bases on your minimum deposit, and how much trading you expect to do, the three account options are ECN mini, ECN standard and, ECN advanced. Keep in mind you can always upgrade your account.

  11. I started trading forex a few years ago and I can concur that its not easy. Its simple to make money, anyone can do that and quickly have a trade go in their favour but being consistently profitable is proving to be a more difficult task.

    I am following a mentor and contrary to what you were doing, listening to news stories and making a decision on what the pairs will do, I’m following a technical method which deals with mass psychology. Even that is apparently not fool proof and the mental aspect of trading, dealing with greed and fear and having the discipline to stick to a plan, no matter what is apparently the most important aspect of trading.

    Since I’m now committed to making this work, I’m trading a tiny $500 account, practicing my skills and learning the art and I hope that in a few years time I will be a successful trader.

    Thankfully working as an IB (Introducing Broker) for the companies looking for new traders is helping me earn an income from the industry, as well as push me to learn more and publish on my site, all the time allowing me to entrench myself further into this industry.

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