10 Things You Need to Know Before You Invest in the Forex Market

Foreign exchange is still a relatively new market to retail investors. The mainstream investment public has only been able to invest in the Forex market for the last decade or so. And even now, I’d say less than 10% of the mainstream investment crowd has even considered investing in this market. I’m sure even fewer actually invest.

But I’m convinced that if more investors knew and understood this market, nothing would stop them from either diversifying into currencies or ditching stocks altogether (as I have) for the much more liquid and consistent Forex market.
The Worldwide Forex Market

It’s really just a question of how to get started. So below, I’ve compiled a list of the “top 10″ things you need to know before you start trading Forex.

Even if you’re already a Forex trader, I still urge you to read on and take these to heart. I think they will help considerably, and make you an even more successful trader.

So let’s get started…

1. Currencies trade in pairs, unlike stocks or commodities. In stocks you either buy Google or IBM and in commodities you will buy oil or gold, etc. But no matter what, you’re still buying one specific financial instrument. In currencies, you are always dealing with two currency pairs at once. Ex. EUR/USD, USD/JPY, etc. Therefore, know the outlook for both countries at hand.

2. Trading in currencies is cheaper than any other financial market because there are no buy and sell commissions, as with stocks and commodities. All you pay is the market maker’s spread (which all financial markets have too). The cheaper your costs, the quicker you can get into the profits.

3. Open a demo account and learn to trade it first before “going live” with real money. You will usually learn how to avoid some mistakes and also get familiar with the broker’s trading platform before you have hard-earned money at risk.

4. Get educated! I can’t tell you how many people I see dive into trading this market and they don’t know, how little they know. Reading FX University is definitely a good start. But I would also recommend taking an inexpensive course. There are literally some out there that cost you only US$20. Be willing to spend that little amount because it may save you thousands in the end!

5. Know where to find the data that comes out on each country and be aware of when it’s coming out! There are several sites available that offer you good tradable data in one handy place. Here are a couple that I’d suggest looking into: www.dailyfx.com and www.forexfactory.com

6. If you’ve never traded Forex before, I recommend opening a mini account first. Trade less and become accustomed to the quick Forex market, before you start using the higher leverage of a standard account.

7. Start off trading small. By that, I mean to trade one mini lot per order at first. Start off with only one order in the market at any one time. Once you get profitable with that, then you can increase your lot size. However, if you can’t make money with a one mini lot trade, you wouldn’t have made money with five mini lots at risk. In fact, your loss would be five times bigger!

8. Start off with a well-capitalized account. Many traders start off saying, “How much do I have to start an account with?” That’s not the right question. You should be asking yourself, “How much is practical to start out with?” You will find that you should start most mini accounts with at least US$3,000 to US$5,000 dollars. Yet in the industry, FX dealers will let you trade with as little as US$200 to US$300 dollars, but I don’t recommend it. Too little capital equalstoo high percentage of the account risked on each trade. That’s the logic behind this point.

9. Risk ONLY 1-5% of your account balance maximum! If you have to risk more of your account than that on a trade, then you don’t have enough money in your account or your stops are excessively wide. Most people err on the former rather than the latter.

10. Start off trading the most liquid pairs out there. These will be the ones with the smallest spreads between the buy and sell quotes. This will be pairs like EUR/USD, USD/JPY, GBP/USD, USD/CHF, EUR/CHF, etc.

If you keep these 10 things in mind as you get started trading, you will be doing yourself (and your account) a favor. I’ve never seen anyone regret it.

Best Regards,
Sean

P.S. Once you got the basics down, the hardest part of trading Forex is actually choosing the trades. Fortunately, if you find choosing trades is not your bailiwick, we can help. My colleague Jack Crooks puts out timely alerts several times a week that tell his subscribers exactly how to buy currency pairs in the Forex market - even exotic currency pairs. Interested? Find out more here.

by Sean Hyman, “Professor FX” and Long-Time Currency Analyst Explaining How You Can Succeed in the Currency Markets.
Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.

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