The foreign exchange market is an incredible thing to behold. Trillions of dollars move between currencies every single day.
Billion dollar hedge funds make enormous bets on which way a currency will fluctuate. Multinational corporations shift money from one currency to another. Huge orders are placed between manufacturers and suppliers in different countries. It all adds up to the largest financial market in the world.
There’s also a place in this immense market for you and me—the retail investors trying to trade forex on a smaller scale. We might not move markets, but we can certainly take advantage of price movements and profit just like the major players.
As complex as the forex market might be, getting a start in forex trading is actually quite simple.
Step 1: Master the Forex Market
I’m always amazed at how many people ignore this step. Don’t start trading financial instruments or markets that you haven’t thoroughly researched.
Yes, it is possible to luck into some good trades without knowing exactly what you’re doing, but luck will only take you so far in the forex market, or any other.
Others skip this step because they are trading at the direction of a so-called expert and blindly following their advice. Trouble is that many of these “experts” have ulterior motives. They may claim to have a guaranteed system in order to keep you paying subscription fees, or they may ask you to directly deposit your investment capital with them. If they push you toward buying obscure assets, they may be involving you in a pump-and-dump scheme.
There’s one simple thing that can thwart just about every scammer: knowledge. If you know the market, you will be able to see through most schemes.
Understand the basics of the forex market
When you trade the forex market, you are trading currency pairs. Basically, you’re betting that one currency will rise or fall in relation to the other.
For example, EURUSD is the symbol for one of the most popular currency pairs to trade. If you buy EURUSD, you are betting that the euro will increase in value against the US dollar. If you sell EURUSD, you are betting the opposite and believe that the dollar will increase its worth in euros.
Currencies change in relative value to one another for a lot of different reasons, which is why the forex market is so dynamic (and so risky). A currency will often move due to economic data such as inflation figures, unemployment numbers, and economic growth rates. Elections, interventions by federal banks, wars (trade or otherwise), as well as market sentiment and technical indicators can also be big factors in price movements.
Simplify your research
As you can see, there’s a lot to keep track of when you’re trading forex. Further muddying the waters, some brokers offer trading in more than 100 different currency pairs. That’s overwhelming for even the most experienced currency traders.
That’s why I strongly suggest you focus on one or two currency pairs, maximum. Research the hell out of your chosen few until you understand the relationship between them and what drives price movements.
Beyond the underlying currencies, you also need to research trading strategies. Most forex traders rely pretty heavily on technical analysis and even if you plan on a more fundamental approach, you still need to understand the basics of reading charts.
There’s an insane amount of forex trading sites out there with an incredible amount of information. Remember to consider the source as you learn. Some forex brokers, for instance, have incredible free resources for learning about forex markets. Just keep in mind that they are heavily incentivized to get you to open an account, so they may oversimplify some things in order to make you comfortable.
Step 2: Choose a Forex Broker
Once you know the market, you’ll need a forex broker so that you can make actual trades. Choosing the right forex broker is an extremely important step. I’ve written more about the process here, and if you’re at this point you should probably read the extended article, but here’s a quick summary:
Figure out which brokers are available in your country
Some forex brokers only offer their services to certain countries due to regulatory differences, political considerations, or other reasons. So depending on your country of residence you may not be eligible to use certain brokers.
Choose between using a regulated broker or an unregulated, offshore broker
If you’re in a country with a well-regulated financial system, you’ll have regulated brokers to choose from. These are the brokers that follow all the rules and have a considerably low risk of going bankrupt. They are transparent with their operations and can be trusted not to lose your deposit.
There are also many unregulated or offshore brokers that don’t have to follow strict guidelines. Should something go wrong, you have an extremely low chance of recouping your funds. Offshore brokers typically offer riskier financial instruments, much higher leverage, and less paperwork. To put it as succinctly as possible, they’re a gamble, but they have their advantages.
If you are leaning toward an offshore broker, I urge you to read my pros and cons article before making a final decision.
Rank your remaining options
After you’ve narrowed the field, it’s time to compare the remaining brokers. When I chose my best forex brokers, I scored each broker on a 1-10 scale for each of the following criteria.
Available trading platforms
Most brokers offer their traders choices when it comes to trading platforms. Many brokers have their own proprietary platform, but also offer MT4 as well as a few other choices. If you plan on trading forex with your phone, make sure your broker offers a reliable mobile trading platform that you’re comfortable with.
Brokers make their money through commissions and spreads. Commissions are straightforward per trade fees, while spreads are the difference between the buying and selling price. Trading costs add up, especially if you plan on day trading. Spreads change depending on market conditions, but you should have a good idea of how much you’ll be paying per trade.
Forex markets move incredibly fast. You need a broker that executes your trades in nanoseconds. Many brokers publish their typical trade speeds, but also look up reviews from other forex traders. If traders are complaining about “slippage,” that means their broker didn’t execute their trades fast enough and prices moved in the few moments between when the trader hit the buy or sell button and when the trade was actually executed.
Regulation and reputation
I always strongly suggest using a regulated forex broker. Forex trading is risky enough without adding the risk that your broker isn’t acting in your best interest.
If you choose to use an offshore broker that is not heavily regulated, make sure you do your due diligence. Read reviews. Check out the broker’s social media. Connect with other traders and ask around.
This is particularly important for new forex traders. If you make a mistake or if you have trouble exiting a position, you need immediate assistance. Quick, knowledgeable customer service reps are invaluable.
This won’t be so important to advanced traders, but this is another category that can be a huge help to new traders. Yes, you can learn to trade forex from a million different sources, but your broker can provide real-time educational content, plus help you master their specific trading tools.
Most forex brokers offer more than 50 currency pairs, with some offering as many as 100. You probably don’t need that many, but if you like trading exotic pairs, the more options the better. A lot of forex brokers offer access to other financial markets as well, so if you are looking to trade other assets, choose a broker with a wide selection.
Ease of withdrawal
This shouldn’t even be a category—if you want to take money out of your account, nothing should stand in your way. It isn’t always so simple in practice, however. The reasons you may have trouble withdrawing your money range from nefarious to bureaucratic. Some of the worst unregulated brokers delay withdrawals with the hopes you’ll give up and continue to trade rather than cash out. Some regulated brokers struggle with quickly adhering to anti-money laundering protocols which dictate additional identity checks for certain withdrawals. The bottom line is that you want a broker that immediately processes your withdrawal request.
Depending on your trading strategy, how long you’ve been a forex trader, and other variables, some of these factors may be more important to you personally. Weigh those factors accordingly, come up with an overall score, and you’ll find the best broker for your individual circumstances.
Sign up for demo accounts
Almost every broker now offers demo trading accounts. Demo accounts are made to exactly simulate trading in real, current market conditions, but of course the money isn’t real. Choose your two favorite brokers, open demo accounts with each and trade for a few days.
You can try out the broker’s trading platforms, judge the response times of their customer service department, and just get a good overall feel for their operation. As an added bonus, many brokers will start sending you special offers once you’ve signed up for a demo account.
For true beginners, this is your chance to execute a forex trade exactly how you would in real life. Choose the currency pair, monitor the price movements, enter a buy or sell position, add a stop loss if you’d like, and watch as your fake account grows. (Maybe it’s just me, but I always seem to have significant success when I’m trading Monopoly money.)
Demo accounts are also ideal for trying out a new forex trading strategy or learning a new-to-you currency pair. Be aware that you might not execute your strategy quite as well once there’s real cash involved as the psychology is always a little different when you’re trading with real money.
If you’re considering a broker that doesn’t offer demo accounts, you can open a demo account directly with MetaTrader. MetaTrader runs the MT4 trading platform (and its less popular cousin MT5), which almost every broker makes available to its traders. If you are proficient with MT4, you can comfortably trade with just about anyone.
After you’ve fake traded for a few days or more, you should have a clear-cut favorite broker. Time to start trading forex for real.
Step 3: Open a trading account
Once you’ve done your research and found a great broker, you’re just minutes away from trading forex for real.
As simple as signing up for Netflix.
The only issue that may arise is if your broker of choice actually isn’t available in your country. You should have eliminated these brokers when you narrowed down your choices, but some brokers aren’t particularly upfront about what countries they operate in. If this happens to you, you’ll get an error message when you enter your country of residence. You’ll have to go with your second choice.
Verify your identity and/or address
As more countries try to crack down on money laundering, this part of the process has gotten more complicated at a lot of brokerages. It’s still not hard. Typically you’ll need to upload a current, government-issued ID and a bank statement or energy bill or other document that has your name and address.
Often the verification is automated, and you can begin trading in a matter of moments. If, for whatever reason, your account needs further authentication, a real person will get back to you. Even if this additional step is required, most brokers will reach out to you within 24 hours and you’ll still be trading by the next business day.
The verification step is most common with regulated brokers, but an increasing number of offshore brokers are now also taking additional steps to verify identities. So if you’d like to skip this step for whatever reason, your options are limited.
Step 4: Fund Your Account
This is where it all gets real. Money will disappear from your bank account and reappear in a trading account. It might be worth making a quick reassessment at this point. Is this money true risk capital—can you afford to lose it should things go wrong?
Most forex brokers want to make this last stage of the process as easy as possible. They can already smell those commissions, so they are heavily incentivized to accept your money by any means.
All brokers accept debit cards and wire transfers, and many accept Paypal, e-Checks, Skrill, Zelle, or other payment apps. Some brokers even accept—you’ll never believe this—checks sent by mail. I’d be really curious how many traders still have checkbooks at the ready.
Step 5: Start forex trading
You’re ready to start trading currencies! I always make a very small trade when starting a new account, even if I spent a week trading in demo mode. I just like to be certain I understand the procedure and have a good grasp of the forex trading platform.
Start trading forex.
Step 6: Stay Aware of the Risks
Forex trading is an inherently risky venture and the majority of retail investor accounts lose money. Use your risk management tools, don’t trade more than you can afford to lose, and stay wary.
Once you’re in the market, it can be easy to get swept away in the excitement and lose sight of what’s at stake. It can feel like a game. Remind yourself that you’re trading real money now.
Always keep in mind that trading CFDs and other highly leveraged financial instruments can result in losing money rapidly. Make sure you understand the more complex financial instruments before you start trading them.