For those accustomed to traditional stock trading, the forex market may appear a little strange when you view it for the first time. The substantial difference most notice is that currencies trade in pairs unlike investing in a single stock or option trade. When you buy the base currency you’re hoping it increases in value against the paired currency also known as the counter currency.
To illustrate how this works, let’s look at a trade with the US Dollar and Japanese Yen. This currency pair will appear as USD/JPY. Usually the base currency is U.S. Dollars, except in the case of the Euro, Sterling, and Australian Dollar.
The trading broker will list the bid and ask price in your forex account. The bid is the price at which the market will buy the base currency in exchange for the counter currency (i.e. JPY). The ask is the price the market is willing to sell the base currency in exchange for the counter currency (i.e. JPY).
With stocks, you make money when the price of the share rises. With forex trading, you make money when one currency pair rises or falls against another depending if you have a long or short position. When a base currency rises, it means that it has a market demand over the counter currency.
When you’re comfortable with the market and feel you have a solid trading strategy, you should open a demo account with a forex broker. This will allow you to practice your strategy in real time. A demo account will allow you to make mistakes with play money.
After you tested your strategy in your demo account and feel confident, you’re now ready to try your first live trade. Every trading platform is different, but the basic concept of opening an order or closing an order should be straightforward.
If you select the right trading platform and broker, you should have access to useful trading tools. Most forex brokers provide account holders with charts, analysis, news, and market reports. Take advantage of these tools to plan or confirm your trading strategy.
Depending if you are a fundamental market or technical trader will determine what tools and data you feel are most useful for your trading strategy.
Decide how you are going to trade the base currency against the counter currency. Are you going long or short? What is your price target, and stop loss? Knowing your objectives, strategy, and tracking techniques will help you trade successfully.