Though forex trading (the exchange of foreign currencies) may seem complicated, the truth is that most people can get started with a new account in as little as a single afternoon.
Step 1: Understand the Lingo
A firm grasp of the most commonly-used forex lingo will make your entry into the market much simpler. Some words and phrases you’ll hear over and over again include:
- Base currency: The currency you are holding. If you’re from the United States, your base currency is most likely the U.S. dollar.
- Quote currency: The currency you are going to purchase.
- Bid price: The price that your broker would be willing to “bid” or “buy” the base currency you are holding.
- Ask price: The price that your broker will “ask” you for in exchange for buying your quote currency of choice. The ask price is always higher than the bid price.
- Spread: The difference between the bid price and the ask price. This is just the broker’s commission.
- Pip: The smallest measurable value of currency movement. The word “pip” is an acronym standing for “percentage in point,” and a single pip is equal to 1/100th of 1% of your currency. For example, if the value of the USD rises by a single pip, that means it increased in value by $0.0001.
Once you know the lingo, you can read a few forex books. Make sure to check out Benzinga’s picks for the Best Forex Books for Beginners. Forex books may seem like they’d be dry, but the authors make sure the reader is entertained and well-informed.
For more common forex trading terms, check out the video:
Step 2: Choose the Right Broker
Before you begin forex trading, you’ll need to choose a brokerage firm. Your brokerage firm will help you make trades, and many brokers also offer additional financial services. Working with a reputable broker can mean the difference between profiting from your trades and losing money between the bid and the ask price.
Don’t be afraid to thoroughly research and read the reviews of a variety of brokerage firms. Not all brokerage firms, offer forex trading, so make sure its available before you open an account. Working with a broker that offers multiple outlets for customer service is highly recommended for beginning traders.
If you can’t figure what forex broker to use – don’t worry. Benzinga compiled a list of some of the Best Forex Brokers in the United States to help you narrow down your choices. If you don’t have time to read our full review, take a look at some of our quick picks below.
- Forex.com: Best for low-cost trading and the largest US forex broker
- TD Ameritrade: Best overall
- optionsXpress by Charles Schwab: Best for beginners
- E-Trade: Best for experienced traders
Step 3: Analyze the World Economy
Making money trading currencies is all about accurately predicting the movement of the global economy. To be a profitable trader, you must convert your base currency into a quote currency set to rise in value, then convert your quote currency back to your base currency when the value peaks.
Research the trading positions, GDPs and political climates of countries you are interested in purchasing currency from, and you’ll get a great “lead” on which quote currency is worth your investment and which countries have economies projected for growth.
This customizable widget from TradingView is a great starting point.
Step 5: Make Your First Trade
Once you’ve decided which quote currency you’re going to buy, it’s time to place an order for your first trade. Your brokerage firm probably provides an online trading software that allows you to place an order to buy or sell a currency.
Using your trading platform, place a market order with your broker. The specifics of your platform may vary.
View a standard market order execution:
After you’ve finished placing your order, sit back and let your broker handle the rest.
Final Thoughts on How to Trade Forex
Before you get started, read up on some trending forex news and understand the risks associated with currency trading. Your wallet (and your peace of mind) will be more at ease.