Maybe you already have experience trading stocks, and are now looking for ways to diversify your investment portfolio. Or, maybe you’ve been fascinated at how events in one part of the world – such as the recent Brexit vote in the UK – can reverberate in currency markets around the world. That could mean you’re ready to trade forex.
Getting started in the forex market is easier than it sounds. For one, if you already have experience trading stocks, the process of setting up a forex brokerage account is similar. There’s just one main difference – when you sign up for an account, you will also need to sign a margin agreement.
This is because leverage is an important part of the forex trading world. When you trade stocks, every $1 of risk capital is used to trade $1 in stocks. However, in the forex world, every account has a certain amount of leverage, usually 50:1 or higher. That means that every $1 of risk capital is used to trade $50 in foreign exchange currency pairs.
That leads to another big difference between trading stocks and trading forex – when you trade stocks, you pay a commission per trade. When you trade forex, you usually pay no commissions on a trade. (Although some online trading platforms such as Ameritrade enable you to choose between commission and non-commission trades)
Instead, you have to look at the spreads between the bid and ask of any trade. The higher the spread – the greater is the implied commission. For popular currency pairs, such as EUR/USD, the spread may be very tight. But for exotic currency pairs, the spread may be very wide.
To turn a modest investment into a big investment, you need to develop a trading strategy. Most forex traders opt for either a technical analysis or a fundamental analysis approach to the market. When you use technical analysis, you are studying charts and figuring out the performance of a currency over a certain period of time. When you use fundamental analysis, you are studying the underlying dynamics of a country, to see whether a currency is strong or weak.
Developing a trading strategy alone can be difficult, so many traders now are turning to online investment communities such as eToro, where they can interact with other traders, get trading ideas and become a more informed market participant. The one feature of eToro that’s attractive is the ability to copy the trades of other successful traders. You can search the more than 3 million traders on eToro to find the ones who are profiting in the forex market, and then copy their winning trades. To diversify your portfolio, you can even copy the trades of multiple eToro members.
Over time, you’ll eventually develop your own trading style. You will learn to spot market trends and anticipate how they will impact specific currency pairs. And you will see that having so much leverage in your trading account opens up many more opportunities to take advantage of those trends. While you may never become a George Soros – who made over $1 billion by shorting the British pound in 1992 – you will become a smarter, more profitable forex trader.