Foreign exchange or Forex trading is the process of speculating on the currency rate of a specific currency pair. Under the circumstances that the currency rate of a particular currency is expected to increase, traders might choose to buy that currency to gain profits. However, if it is expected to decrease, they might sell off their share to avoid excess losses. This process of currency exchange is referred to as Foreign exchange trading. Before engaging in online Forex trading, there are some key factors that one must know:
1. Know the Forex Trading Terminology: Terminology is the first step to Forex trading systems, if you are a beginner. It would, therefore, be a good idea to familiarize yourself with the several terminologies used in the field. Here are some quick terms to remember.
• Exchange rate: This refers to the rate of exchange of one currency for another, or the value of one currency measured in terms of another.
• Cross Rate: This is the rate of exchange of two currencies when quoted in a third, unrelated country.
• Quote and Base Currency : The basic premise of Forex trading is that an individual buys one currency in exchange for another. The currency that is being sold or given away is the base currency and the currency that is bought or gained in return for it is the quote currency.
• Bid Price: This is the price at which an individual is willing to sell their quote currency on the market.
• Ask Price: Also known as offer price, this is the best price at which one is willing to buy from the market.
• Spread: The difference between the bid price and the ask price on the market is known as spread.
2. Opening an Account.The next most important step in Forex trading is to open an online account. There are a number of brokerage firms trading in Forex on the Internet. You need to choose the firm that you think is most reliable, successful and trustworthy before you open an account with them. Ways of ensuring that a brokerage firm is just what you need is by doing the appropriate research on them. Make sure that they have been in the industry for at least a decade. Their long-term presence is an indicator that they are reliable and established. In addition, check to see that the regulating authority that governs your brokerage is a government authority. This is a significant guarantee of the company’s authenticity. Reviews can often help gauge if the company is professional and reputed. However, do not base your decisions on reviews alone. Check to make certain that the brokerage has a good customer support facility. This is extremely important not only in ascertaining the company’s trustworthiness, but also their support and facilities to customers and service standards.
3. Having a Trading Plan. It always helps to have a Forex trading plan. Planning your trade in advance and having an objective trading plan always helps in the long run. Moreover, it is always advisable to log your activities and maintain a record of your moves, profits and losses for future reference and analyzing trends. While placing orders through brokers, you can place a market order to buy and/ or sell at the market rate. Or, you could place a limit order that specifies the rate at which you want to make a purchase or sale. Depending on this, the broker will execute the deal when the prices reach the level you want them to be. Alternatively, you can also place stop orders. This is the choice to buy or sell above or below the current market rate. This decision is made in anticipation that a particular currency is going to either rise or fall in value, respectively.
Engaging in Forex trading can be highly profitable as long as you make the right moves. The subject itself is so huge that it is best for individuals to do a large amount of reading and research before entering into the trading field.