Forex Trading - Getting Started

If you have heard about the advantages of Forex trading and would like to try it yourself, this guide to Forex trading will get you started.

Forex trading used to be the exclusive domain of large investors such as national banks and multi-national corporations, but thanks to relatively recent regulation changes and the spread of Internet trading it is now within reach of almost everybody.

Forex trading involves the buying and selling of large blocks of currencies, but the average investor now has access to these currency blocks through a system of leverage. This allows the investor to borrow money for Forex trading by putting up as little as 1/100th of the currency value.

Leverage (also referred to as margin) allows investors to control US$100,000 (a standard lot) with an investment of US$1,000. Mini lots of $10,000 can be controlled with an investment of $100.

Risks in Forex Trading

Borrowing large sums of money always carries a risk, and Forex trading is not immune from this risk. Each time a currency moves one pip (the smallest currency unit) there is a profit or loss of $10 for standard lots and $1 for mini lots. A sudden run on a currency can get the Forex trader into trouble.

However, there are safeguards in Forex trading that help to minimize losses. Most trades are done on the Internet with software that can automatically exit a position at a specified point. Every Forex trader should take advantage of these safeguards to minimize the risk of Forex trading.

Brokers for Forex Trading 

Most Forex brokers are reputable firms associated with large financial institutions but there are a few bad apples out there. Always investigate the credentials of a Forex broker before you sign up for a Forex trading account. Make sure that the broker is registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC). These affiliations will protect you against fraud and abusive trade practices.

It is very easy to open a Forex trading account. Usually you just fill out an online form and provide some sort of ID that can be faxed or mailed to the broker's offices. A standard part of the Forex application is a Margin Agreement that gives the broker the power to intervene in any trade it regards as risky. This protects the broker against undue losses and also has the benefit of restricting the amount of money you can lose. Remember - Forex trading is done with borrowed money so both the lender (the broker) and the borrower (the Forex trader) are protected with a margin agreement.

There are various types of Forex trading accounts. Most brokers offer a standard account which must be funded with at least $1000. Mini accounts can be funded with an investment of as little as $100.

Next: Forex Trading Part Two - Demo Accounts