SENSEX NIFTY
Jun 04, 2010, 10.49 AM IST | Source: Moneycontrol.com

Learning to trade Foreign Exchange markets

The financial markets and business in general have always been a fascinating topic. Free markets are what make us a democracy and let us strive to make money. In the simplest form business is just making something that someone else wants or needs.

Learning to trade Foreign Exchange markets

The financial markets and business in general have always been a fascinating topic. Free markets are what make us a democracy and let us strive to make money. In the simplest form business is just making something that someone else wants or needs. As businesses grow and expansion is needed they use the financial markets to gain access to more money that will help them obtain their future goals. In today’s world these businesses are multinational. They both buy and sell their goods over the entire globe , shipping goods daily between continents. Even though these countries have different currencies, there are fluctuating exchange rates that allow all businesses to convert money received into their home currency.

These exchange rates move throughout the day, so much so that investor and traders are able to earn a living by buying and selling various currency pairs. The currency market is the largest most liquid market in the world, with almost four trillion dollars changing hands each day. It was once mostly traded by big banks, but now through the use of retail foreign exchange brokers individuals at home can follow the price movements of any currency and trade them. If you as an investor, or someone who is just interested in trading, have decided that you would like to trade currencies it is very easy to start.

Maybe you have just received a birthday gift or have put a few dollars away from every pay check to fund a brokerage account. Luckily enough trading the forex market only requires a small initial deposit to start trading. The reason you can trade with such a small deposit is that forex brokers give you leverage to buy the currency. This leverage can be as great as 400:1. This means that if you fund your account with $100.00 USD that you will be able to buy $40,000.00 USD worth of currency.

This leverage allows you to make profits with such a small deposit. Since most currencies trade within a pennies range during the day, you need to buy a large amount to make a sufficient profit. Be warned though, this leverage acts against you if the currency pair you just bough starts to lose value. Leverage is a double edged sword, meaning that it will give you greater returns when you are right and greater losses when you are wrong. Looking at the many forex broker reviews will tell you the amount of leverage each broker will provide you with when opening a trading account. Typically the more money you deposit with them the more leverage you will receive. This does not mean you are required to use all the buying power you are given. Starting off with smaller lots will give you an idea of how the markets move without putting all your capital at risk. Managing risk is a very important skill to learn when trading in any market especially the currency markets.

Be sure your forex broker will allow you to place stop loss orders. This is one way to manage your risk. Once you place a trade to buy a particular currency, you should have an idea of where you will sell, if it starts to lose value. No one can predict where the price will go; traders need to have a price where they will exit a trade. It might either be a pre determined dollar amount like a loss of $20.00 or a percentage drop of 5%-10%. If you do not use these and the market continues to drop your loss can become so large that you will need to deposit more money just to make more trades. This is never a good sign that you are ready to trade full time. Being disciplined and taking small loses instead of big ones is key to becoming consistently profitable . You will eventually make profitable trades; you will also make trades that will lose you money. Let your winners ride and cut your losses before they get out of control.
 

1 2 3

ADS BY GOOGLE

video of the day

Risk is a four letter word: Author Jerome Booth

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.