One of the easiest ways to pocket a little extra cash without putting up a lot of capital is to trade foreign currencies, or Forex.The Forex market allows traders to buy and sell currency pairs 24 hours per day from the comfort of their homes from Sunday evening to Friday afternoon, meaning you have nearly three times the trading window as you would with the stock market. With over $3 trillion in trades happening every single day, it is the largest and most liquid trading activity in the world. What this means to you is that you have lots of people you can make money off of. Of course, this means there are plenty of people out there to take your money as well. With some knowledge, practice and discipline, you can avoid being eaten by the big boys and take a small piece of a very large pie home every day.
Opening a Forex Trading Account
Forex brokers actively encourage small retail traders to open accounts with them. Many of these accounts can be started with as little as $25. In fact, some companies will pay you to open an account, offering $50 accounts in free, real money to get you started on your trading career. Of course, they know that once a new trader starts trading, the broker will get their money back in 95% of the cases, with an extra helping of the new trader’s money as he replenishes the depleted account with funds from his own bank. Like a casino, the odds are greatly stacked in the broker’s favor that you will lose that initial deposit and will place more money with them.
Start with a Forex Practice Account
To avoid the pain of getting wiped out in the first 10 minutes of trading Forex, you should open up a free demo account first. Brokers regularly offer demo trading accounts with $50,000 in “play money.” This can be traded live as if it were real moolah, with actual market pricing affecting your trades and account balance. In this way, new traders can learn experience the rollercoaster of emotions involved in trading, and develop their own trading methodology. Nothing replaces the experience of trading with your own money, but this is a great way to familiarize yourself with the broker’s proprietary trading platform and get your feet wet. If you lose all the money in this demo account, you know it’s time to re-evaluate your trading strategy and do some more learning at the myriad free training sites on the web.
Here is where you get your account wiped out if you are not careful. Automated stop losses will get you out of a position once prices move against you by a level that you pre-determine. Stop losses are crucial for new Forex traders in order to minimize the risk of losing all their cash in a single trade. What tends to happen is that traders place open a position, it goes well for a few minutes, then it reverses drastically. The trader then starts hoping and praying that the position will reverse and they will at least come close to breaking even. Rarely does this ever happen. Most times the losses just keep getting bigger and bigger, and you will eventually have your account balance at a whopping zero dollars. Ouch. Stop losses help prevent this.
Price movement in the Forex market is measured in “pips,” which are 1/100th of one cent in dollar-based currency pairs, such as the GBP/USD. For example, in a price move from $1.6803 to $1.6804, the price increase is one pip. Traders try to “capture pips” by going long or short on their trades, betting that the price of a currency pair will move up or down just as stock prices do in the stock market. A successful new trader may capture between 10-20 pips on a daily basis, with 100 pips per day being outstanding even for veteran traders.
Scalping refers to entering and exiting a position quickly for a few pips of profit. Scalpers enter a trade and exit within a few seconds or minutes after making three ot four pips, making a few dollars here and there instead of waiting for a big price move in their favor. The advantage to scalping Forex is that you do not expose yourself to the same degree of risk as you do with longer trades—you can be mostly in cash while watching your charts for a nice set-up, and get in and out for a quick payday. Scalping is not frequently practiced by larger traders, but for the everyday man it can keep him in the game while learning, as long as intelligent stop losses are utilized.
More on this topic
Forex Trading Accounts – New Traders Flock to Foreign Exchange
The Language of Forex: Understanding Foreign Exchange Terms
Best Free Forex Trading Demo Accounts Review
The Benefits and Risks of Leverage in Forex
Forex traders control a large amount of currency with little amounts of actual deposited cash. 100-to-1 or greater ratios have been common in recent years, but recent regulatory pressure is starting to change this. Using leverage, account funds can be expended quickly due to margin calls as positions move away from traders. Large leverage is one of the reasons why Forex can make a trader so much money even with small accounts, so low leverage is not desirable to most participants in this market. Fortunately, traders desiring high leverage can open accounts overseas with brokers such as FXCM and InterbankFX and maintain 100-to-1 or greater ratios in their trades.
Common Forex Currency Pairs
The most heavily traded currency pair is the EUR/USD (buying the Euro currency using U.S dollars). The British pound and Japanese yen are also frequently traded and recommended for traders because they are so liquid and have low spreads. A spread is the difference between the bid/ask price and represents the broker’s commission. The more liquid the pair, the tighter the spread and the more money you can make on price moves. New traders should focus on the EUR/USD and move on only when they have demonstrated competence with this pair.
Forex trading can be very rewarding, but can also lead to great losses like any other speculative activity. Do not put a lot of money into Forex until you demonstrate you have the discipline to walk away from losing trades and develop your own successful strategy for making money. There are many free online resources that teach all aspects of Forex trading, including technical analysis, so make sure you take advantage of it and don’t enter the market blindly.