How to start Forex trading

In this article, we're going to look at the things you need to consider if you want to start trading Forex in 2018.

Here you can learn how to go about selecting a broker, setting up a trading account, dedicating funds, using a trading terminal and a few other useful things when getting started in Forex.

The broker

Brokers by regulation

When learning how to start Forex trading, the first step is to create a safe trading environment. Protecting your investment starts with choosing a broker.

Trading financial markets is a regulated activity in most countries around the world, especially in the world's financial hubs like the UK, the USA, the EU, Japan, Australia, and Canada. A regulated activity means that there is appropriate legislation and a dedicated government or institution that licenses and regulates financial brokers. Those institutions will take arbitrary positions should anything go wrong in your relationship with your broker. If a broker doesn't have a licence, you are protected only by the terms of the contract it offers, which isn't enough. When signing a client agreement, make sure you are making a deal with an entity that does have a licence.

There are plenty of trading account providers to choose from and every broker or bank has their unique selling points that fit will various trading needs and tastes.

Brokers by order execution

The second step in selecting a broker, is figuring out what model of order execution to use. Simply put, there are two kinds - with or without a dealing desk.

Dealing desk brokers are often referred to as market makers. A market maker, as opposed to merely an access provider, is a type of broker who creates a market for you by showing actual price quotes, keeping your money if you lose, or rewarding you with their own if you make a profit. Since the only other trading party on this market is your broker, it is called a market maker.

No dealing desk brokers or no dealing desk accounts allow more market depth and tend to have floating spreads and longer order execution times. When an order is placed on such an account, the ECN broker processes it and sends it on to the market. In this way, instead of trading with your broker, you are trading with one of the millions of traders that are out there.

For many traders a broker being a market maker is a no-go and they prefer going with an ECN. But is your broker being a market maker really a bad thing?

A short answer - if the broker is licensed by a strict financial authority such as the FCA in the UK, the ASIC in Australia, or the regulator working under MiFID within the EU you can feel comfortable. You are safe from (a) the broker manipulating your funds or altering charts and (b) your funds are kept in a segregated account in case either the broker or their bank file for bankruptcy.

The other item that may really matter to you is the order execution speed. You see, even an electronic signal has a delay. It takes longer for an order request to get from your computer to the broker's server, to their liquidity provider's server and then the same on the way back, than it does for the request simply to reach your broker. If the speed of order execution is vital for your trading strategy, perhaps a broker with a dealing desk is something to consider.

The account

Now, that you have selected a broker, let's get to step two - selecting a suitable trading account.

A trading account with a broker is much like your ordinary debit account with a bank with one tiny but important difference - you can use the funds on your trading account to tap into the financial market. In this example, you can use funds to start Forex trading online.

There is a great variety of trading accounts to choose from, and most retail Forex brokers have several of them available.

Things to pay attention to depend greatly on what you are planning on trading and how. Accounts vary in a minimum initial deposits, leverage provided, financial instruments available for trading and other minor trading features.

There are micro accounts that allow trading with as little as $10 using the smallest available volumes like 0.01 of a lot, or a micro-lot. These types of accounts sometimes allow up to 1:1000 leverage enabling a trader to make a considerable profit or loss right from the start. The list of instruments on such accounts is usually limited to 20-30 of the most popular currency pairs.

There is always some sort of a 'standard account' available. This account type allows not only Forex trading, but also CFDs, metals and energy futures trading. In other words, the majority of instruments available with the broker will be available on the standard account. The initial deposit on this account is likely to be a bit more palpable, starting from $100 to $200. Leverage is more modest and the spread is likely to be around 1-2 pips for majors.

There is often a dedicated currency trading account with extra tight spreads for the scalper-type traders out there. These usually go with a $1k minimal deposit, up to 1:100 leverage or lower.

Sometimes brokers have VIP accounts with extra features. Bonuses on funding, swap free, spread free, rebates and other features to lure heavyweight traders. Generally speaking, if you deposit enough money, you can negotiate almost anything with a broker.

Whichever account type you will come to choose with your broker, make sure you read and understand its terms, conditions and everything is has to offer.

Financial leverage

When reading guides on how to trade Forex or going through Forex forums, sooner or later you will stumble over a debate on whether high leverage is a good thing or a bad thing. It is worth mentioning that no stock brokers, commodities brokers or any other financial brokers offer leverages as high as Forex brokers do. When it comes to high leverage, there is a thin line between using and abusing.

One important point to understand here is concealed by a technicality of how leverage works. You see, the leverage influences the margin, however it does not influence pip value - trading volume does.

It is true that higher leverage can be used to trade higher volumes. Overtrading, whether by opening too many orders or opening orders that are too big would simultaneously lead to less free margin and a higher pip value. As a result, the trading account becomes much more susceptible to margin calls because it simply cannot withstand the market volatility. This is a textbook example of how not to start Forex trading. Poor money and risk management can get an account balance wiped clean before a trader has even got started with Forex. Read this article about the top 10 money management tips.

On the other hand, assuming all other things are equal and higher leverage is used to trade the same volumes as you would with a lower leverage, you get more free margin keeping the same pip value. As result, your account can withstand higher volatility.

Trading capital

First and foremost, never trade with the funds you can not afford to lose. Starting out in Forex trading is just like starting to trade in any other finacial market - a risky business where only risk capital should be used. Trading with money one can afford to lose also eases the strain on the trader's psyche, which will be heavily tested as it is, especially on the early stages of learning how to get started with Forex trading.

Most beginner traders are cautious with their initial deposits, but often deposit much larger sums after getting a taste of Forex trading. This usually means two things; they lost the initial deposit, while growing anxious and excited, so aim to recoup with the help of additional funds and higher volumes. Sooner or later the double-or-nothing strategy inevitably leads to disaster, and in Forex it is often sooner rather than later.

Consider what funds you can afford to lose should you face any losses. Just remember that in Forex, it is not the market that will be your potential downfall - it's you.

Trading software

A trading terminal or a trading platform is the software which a trader uses to perform trading activity.

When learning how to start Forex trading from home a lot of traders start by getting acquainted with the platform. There are many kinds, and usually more than one is offered by each broker. They all work more or less the same and include a list of financial instruments available for trading, a terminal with information about your balance, margin, equity, free margin and ongoing trades, and the chart screen that informs you of the price-time action of a selected instrument. Once you get the hang of using one of the platforms, you will get them all.

For a fundamental kind of a trader, a platform is merely a tool for order placing. For the technical trader however, a platform is also a tool of analysis, as it enables various charting techniques as well as the usage of technical indicators.

Let the trading begin

It is highly recommended to anybody interested in learning how to start trading Forex online to read as much as possible. There will be a lot of duplicated information, especially at entry level, but the more you read the clearer things will be and the more idea you will have on what to do next.

This wraps up the basics on how to get started in Forex trading. If you have never traded before, start a demo account. It takes just five minutes of your time, costs you nothing and allows you to safely experience the Forex market. Practice on a demo account, but only long enough to understand the mechanics. To learn about actual trading and to get a real feel for being in the market you need to trade on a live account, but that will come with time.

You might also find useful the following articles:

Forex Trading for Beginners

Top 20 Forex Trading Tips You Should Know