One of the first questions we hear from someone looking into forex is, “how do I get started?” There are two ways we will show you on how you can get started in trading foreign currency, but first let’s not jump in too quickly as there are a few things we need to determine before diving in…
First things first, trading foreign currency or forex has more risk than your typical market. Because of this we need to determine if we have the tolerance of risk to even want to go down this road. Understanding this risk goes hand in hand with understanding how the forex market utilizes leverage. Leverage is simply utilizing a small amount of money to hold a larger position. One of the easiest ways to describe leverage is to show you an example.
Let’s use a popular stock like Apple Inc. (NASDQ: AAPL). If I wanted to invest in Apple stock today, I could for about $500 per share. So if I bought 20 shares this would cost me $10,000 (plus any brokerage fees). Now if my Apple stock goes up $10 per share to $510, my initial investment of $10,000 is now worth $10,200 ($510 x 20 = $10,200 minus the cost to place the trade, of course). Using this scenario you can see that I have made a .2% return of my investment.
Forex trades a little bit differently. In the forex market we don’t own shares, we are simply holding a position in a particular currency pair. Let’s use the most popular currency pair as our example, the Euro and the US Dollar (expressed EUR/USD). Right now it takes roughly $1.30 US to buy 1 Euro. Numbers are expressed in hundredths in forex so the price would look like 1.3000. A standard lot size is $100,000. If we didn’t have leverage it would take $130,000 US dollars to hold this position. Since we have leverage (in this case 50:1) we can hold this position with only $2,600.00. The EUR/USD moves up and down a penny at the most most each and every day. This may not sound like a lot but when you consider that, we express pricing in 100ths and this can be a large move. Each 1/100 move in the EUR/USD is also called a “pip.” This is our smallest unit of measurement. In this example each pip is measured at a $10 value. So a quick move on the EUR/USD from 1.3000 to 1.3100 means 100 pips or $1,000 profit or loss depending on whether we were buying (hoping the price would rise) or selling (hoping the price would fall). That’s right! In this market you have two choices. Not necessarily to just buy or sell. but whether to buy or sell. The forex market is bi-directional and since you are not holding the physical currency, you can speculate on whether the price will go up or go down. This gives you the opportunity to buy when price is rising and sell when price is moving down.
An investor can participate in the forex market in two ways. The first way is through a self-traded account. There are about a dozen US brokers right now that can quickly and easily help you open up an application on their website electronically in just a few minutes. Additionally, you can fund your online account typically with a credit card, paypal, bank wire, or ACH transfer. The broker then will allow you to utilize their software to place online orders and use as often as necessary if have an app for your mobile device or tablet. The decision then becomes yours as to when to buy and when to sell. Just ask anyone that has ever traded in this market and you will see that this can be easier said than done. The forex market is a fast moving market and prices can quickly spike either up or down. Placing a trade is easy to do but making money on that trade is a difficult task every time. There are many services out there today like Get Forex Alerts. For a small monthly fee an investor can pay to have trade recommendations emailed or sent to their smart phone via text along with reasons and commentary for why trade ideas are happening. Services like Get Forex Alerts will even put on webinars and offer one-on-one help to train and mentor you as you navigate the currency market.
If an investor does not want to trade his or her own money but still wants to participate in this market, they can still open up their account through a broker and select a professional money manager to place trades on their behalf. This is becoming a popular choice for those seeking an alternative asset class for their money who may not have time to trade or learn a new market. Holland Global Trading is a company of licensed CTA’s (Commodity Trading Advisors) who trade on behalf of their clients. Often traders who have tried to trade the forex market but failed to do so successfully, find themselves hiring a CTA like HGT to manage their transactions on their behalf.
With all this said, investing in currency is quite simple yet it can also be costly, if you don’t know what you are doing. As with any type of investing, forex is no exception. You should never invest money into any market, including forex, that you cannot afford to lose. The currency market presents a great opportunity to have your money at work 24 hours a day as the market runs on global banking hours. Monday morning in Australia is Sunday night in the United States, therefore, this market is open 24 hours a day from Sunday evening to Friday afternoon. This has made the forex a widely sought alternative investment and the fastest growing market in the world, currently at over $4 trillion in volume traded daily.
This is merely a quick overview of how forex is traded and how using leverage in the forex market can allow you to have such rapid growth as well as loss. We also briefly touched the subject on how to get started with opening an account on your own or as an investment. What we would like to continue bringing to you in upcoming articles is what you need to look for when it comes to choosing a broker to trade with, what currency pairs to trade, what you need to be aware of when placing trades such as margin requirements, spread factors, and what it means to have slippage within forex trading. You can expect future articles to include many details about forex.
About Holland Global Trading: Holland Global Trading is a registered commodity-trading advisor (CTA) with a client base that includes a unique blend of both seasoned Forex veterans and people who are completely new to Forex. Our trading team is dedicated to providing research and technical excellence.
As with any investments we MUST state: Disclaimers and Disclosures – Forex trading carries a high level of risk and may not be suitable for all investors. Trading on leverage magnifies the potential for profit and loss. Before deciding to trade forex, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that this website is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. The information and opinions found on this website are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this website are subject to change without notice. The reports within the website have been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
