How to Learn to Trade Currencies
- 1). Understand the risks of trading currencies. Traders execute transactions with very low margin requirements. For example, you might put up $1000 to buy 80,000 euros at an exchange rate of $1.25 per euro (this equals a standard lot of U.S. $100,000). If the exchange rate changes by a single penny, you can sell the euros for $1.26 each, making $800 (80,000 x $0.01). But if the exchange rate moves just one cent per euro the other way, you lose $800 of the $1000 you risked.
- 2). Open a free practice forex trading account. Leading forex brokers offer these accounts free of charge to help people learn the basics of trading currencies without risking real money. Most practice accounts use real-time market data. You can become familiar with the broker's trading software (if you don't already have your own), learn the mechanics of various types of currency trades, and experiment with different trading strategies.
- 3). Study the fundamentals. While daily currency trading is driven by short-term market trends, ultimately, major market movements result from the influence of larger market economic and political forces. A country's balance of trade, monetary policy, inflation and interest rates, and degree of political stability all play major roles in determining the exchange value of the currency.
- 4). Learn to understand and use basic technical indicators. Sometimes referred to as forex signals, technical indicators track short-term trends and help you anticipate which way a currency exchange rate will move.
- 5). Start trading with a forex "mini account." Forex brokers offer mini accounts primarily for novice investors. Transactions in a mini account are based on much smaller amounts of currency than are used in regular trades. For example, the lot size is often reduced from the standard $100,000 to $10,000. Margin requirements are proportionately smaller, allowing the beginner to start trading real currency without placing large sums at risk.