Tutorial: How To Trade & Open A Forex Account

How To Trade & Open A Forex Account
How To Trade & Open A Forex Account

You think you're ready to trade? Be sure to read this section to learn how you can set up a forex account so you can start trading currencies. We will also mention other factors that you should consider before you take this step. We will then discuss how to trade Forex and the different types of orders that can be placed.

Opening a forex brokerage account

Forex trading is similar to the equity market because individuals interested in trade need to open a business account. Like the equity market, each forex account and the services it provides differ, so it is important that you find the right one. Next we are going to talk about some of the factors that need to be considered when selecting a forex account.

Leverage

Leverage is basically the ability to control large amounts of capital, using very little of its own capital; The higher the leverage, the higher the level of risk. The amount of leverage in an account differs depending on the account itself, but most use a factor of at least 50:1, with some being as high as 250:1. A leverage factor of 50:1 means that for every dollar you have in your account you control up to $50. For example, if a merchant has $1,000 in his account, the broker will lend that person $50,000 to trade on the market. This leverage also makes your margin, or the amount you have to have in your account to trade a certain amount, very low. In shares, the margin is at least 50%, while 50:1 's leverage is equivalent to 2%.

Leverage is seen as a major benefit of forex trading, as it allows you to make big gains with a small investment. However, leverage can also be a negative end if a trade moves against you because your losses are also amplified by leverage. With this kind of leverage, there is the real possibility that you can lose more than you invested-although most companies have protection stops that prevents a negative IR account. For this reason, it is vital that you remember this when you open an account and that when you determine your desired leverage you understand the risks involved.

Commissions and fees

Another important benefit of forex accounts is that trade within them is done without commissions. This is unlike the capital accounts, in which the broker is paid a fee for each trade. The reason for this is that you are dealing directly with those responsible for the market and you don't have to go through other parties like racers.

This may sound too good to be true, but be assured that market makers are still making money every time you trade. Do you remember the offer and ask in the previous section? Every time a trade is made, it is the ones that make the market that capture the spread between these two. Therefore, if the offer/order of a foreign currency is 1.5200/50, the manufacturer of the market captures the difference (50 basis points).

If you are planning to open a forex account, it is important to know that each company has different spreads in currency pairs negotiated through them. While they are often differentiated by only a few pips (0.0001), this can be significant if you trade a lot over time. So when you open an account make sure you find out the PIP spread you have in foreign currency pairs you are looking for to trade.

Other factors

There are a lot of differences between each forex company and the accounts they offer, so it is important to review each one before making a commitment. Each company will offer different levels of services and programs along with the fees above and beyond the actual trading costs. Moreover, due to the less regulated nature of the forex market, it is important to go with a reputable company.

How to trade Forex

Now that you know some important factors to keep in mind when opening a forex account, let's take a look at what exactly you can operate within that account. The two main ways of trading in the foreign exchange market is the simple purchase and sale of currency pairs, where a coin and a short other will be released. The second form is through the purchase of derivatives that track the movements of a specific currency pair. Both techniques are very similar to the techniques in the stock market. The most common way is simply to buy and sell currency pairs, much the same way most individuals buy and sell shares. In this case, you expect the value of the couple to change in a favorable way. If you go a long time a couple of currencies, you are hoping that the value of the couple increases. For example, let's say you took a long position on the USD/CAD pair-you will earn money if the value of this pair goes up, and you lose the money if it falls. This pair rises when the US dollar increases in value against the Canadian dollar, making it a bet on the US dollar.

The other option is to use derivative products, such as options and futures, to take advantage of changes in the value of coins. If you buy an option in a currency pair, you are earning the right to buy a currency pair at an established rate before a set point in time. On the other hand, a futures contract creates an obligation to buy the currency at an established time. These two trade techniques are usually only used by more advanced traders, but it is important, at least, to be familiar with them.

Types of orders

A merchant seeking to open a new position will probably use a market order or a limit order. The incorporation of these types of orders remains the same as when they are used in the stock markets. A market order gives a forex merchant the ability to obtain the currency in any exchange rate that is currently trading in the market, while a limit order allows the merchant to specify a certain entry price.

Forex traders who already have an open position may want to consider using a profit order to block on a profit. Say, for example, that a merchant is sure that the GBP/USD rate will reach 1.7800, but he is not so sure that the rate could rise higher. A merchant could use a take-profit order, which would automatically close its position when the rate reaches 1.7800, locking on its profits.

Another tool that can be used when operators maintain open positions is the stop-loss order. This order allows traders to determine how much the rate can be declined before the position is closed and more losses accumulate. Therefore, if the GBP/USD rate begins to fall, an investor can place a loss that closes the position (for example in 1.7787), in order to avoid any other loss.

As you can see, the type of orders you can enter into your forex trading account are similar to those found in the capital accounts. Having a good understanding of these orders is critical before you put your first trade.

Source:www.investopedia.com/university/forexmarket
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