Forex Trading: Fundamental First Steps

Are you just starting out in the Forex market? It's truly not as complex as it looks. If you can understand a price chart you're a big step ahead. In fx trading you can become profitable whether the market goes up or down. You can even profit if it's moving sideways.

The foreign currency market is the biggest on this planet, dwarfing all US stock markets taken together. Total volume of forex trading now comes near $4 trillion each day. The forex is a de-centralized, over-the-counter market like the NASDAQ. It is missing a central place where trading takes place as the NYSE does.

The great volume makes the forex market the most liquid on earth. This is why trades can be filled so swiftly. For every purchaser it's easy to find a seller. For each trader seeking to sell a buyer is available. This market operates 24 hours a day from Sunday evening (if you live in North America) continuously through til Friday afternoon...about 5½ days a week.

Before forex trading was only accessible to banks and other big financial institutions. Nonetheless due to the proliferation of the internet -and resulting advances in information technology- in recent years an dynamic 'retail' market has developed where smaller companies and individuals now have access to the forex marketplace.

A unique characteristic of forex trading is the leverage. This is the quantity of money you must put up to control a related amount of currency. When trading stocks you can trade "on margin" where you borrow capital from your broker to purchase stocks. This can give you leverage of 2:1. In forex the norm is 100:1. Some brokers have available leverage as high as 400:1. This can be a two-edged sword. Yes, it can dramatically boost your gains; it can also magnify your losses as well. The Commodity Futures Trading Commission (CFTC) is now (spring 2010) considering a new rule that would trim down leverage in the forex market to 10:1.

Understanding these, and other concepts, of the forex market is why it's crucial to have solid preparation and some familiarity before trading the forex market with your own funds. Good quality forex education is readily accessible from just about any broker. You can also find paid training from numerous resources on the web. Once you have the basics mastered you should open a "paper trading "or demo account offered by most brokers. This will give you knowledge in what real trading is like. Paper trade until you're both comfortable and profitable. Only then move into trading with your own capital.

To begin paper trading you'll have to choose a broker and become familiar with the trading platform they offer. One platform, used by greater than 200 brokers, is called Meta Trader 4 - MT4. This platform is simple to learn and has loads of indicators to be had. For these reasons MT4 is a good selection for scores of traders. Learn the fundamentals of chart reading and how to decode different price patterns on the chart. This skill is called Technical Analysis. There are tomes of material written on this subject.

Each Forex chart is different although they present the same price fluctuations. As for instance, on the daily forex chart, you can evaluate market trends in the past one day to help you decide on the next 24 hours of trading. On the hourly chart, you can identify developments within the day. And, on the 15 minute chart, you can see the recent short-termactivity. Using the 5 minute chart gets you closer to the action and is used for very short term trading such asscalping.

These are the essentials on how to trade the forex market. At all times remember that apart from the earning capability that is to be had in the Forex market, there are also considerable downside risks that you have to be aware of. You need to plan your trades and trade your plan. Set rules and guidelines for yourself and then follow them. Discipline is key. The psychology of trading is a topic unto itself that we will deal with in subsequent piece.