Forex trading for beginners in the U.S.
Introduction: Can you trade forex in U.S.?
There is a myth among nonprofessional traders that Forex trading is banned in the U.S., but this is not true. Forex is not prohibited in the U.S., but the actions of brokers are very tightly monitored.
There are several laws aimed to improve financial stability and protect consumers and investors from illegal activities by financial traders. If traders break these laws a heavy fine may apply.
Every forex broker operating within the United States must be registered with the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) to be able to operate.
What is the forex market?
The foreign exchange market is where currencies are traded. Currencies enable purchase of goods and services locally and across borders and need to be exchanged to conduct foreign trade.
Currency trading is conducted electronically 24 hours a day, five and a half days a week, worldwide in the major financial centres, hence the forex market can be extremely active any time of day, with price quotes changing constantly.
Although the forex market has been around for centuries, with people exchanging or bartering goods and currencies to purchase goods and services, the forex market as we understand it today, is a relatively modern invention.
Since 1971, more currencies were allowed to float freely against one another, their values varying based on demand and circulation and monitored by foreign exchange trading services.
Although investment banks conduct most of the trading in forex markets on behalf of clients, there are speculative opportunities for trading one currency against another for professional and individual investors.
Before one gets started on the forex journey one should first learn its language. Here are a few terms to know:
- Forex account – A forex account is the account you use to make currency trades.
- Ask – An ask is the lowest price at which you are willing to buy a currency and is generally greater than the bid price.
- Bid – A bid is the price at which you are willing to sell a currency.
- Bear market – A bear market is one in which prices decline for all currencies, signifying a market downtrend and the result of depressing economic fundamentals or catastrophic events.
- Bull market – A bull market is one in which prices increase for all currencies and signifies a market uptrend which is the result of optimistic news about the global economy.
- Currency pair – All forex trades involve a currency pair.
- Pip – a pip (short for percentage in points) refers to the smallest possible price change within a currency pair.
- Bid-ask spread – Exchange rates are determined by the maximum amount buyers are willing to pay for a currency (the bid) and the minimum amount that sellers require to sell (the ask). The bid-ask spread is the difference between these amounts.
- Lot – Forex is traded by a lot, which is the standardized unit of currency.
- Leverage – is another term for borrowing money and allows traders to participate in the forex market with a smaller amount of money than otherwise required.
Can I teach myself forex trading?
Yes, the best forex brokers all offer a variety of educational materials, including articles and videos, that you can apply to teach yourself forex trading. This will not guarantee success but is an important first step.
Forex trading step by step
- Choose only regulated brokers to open a live account. Set up a micro forex trading account with low capital requirements. Such accounts usually have variable trading limits and allow brokers to limit their trades small amounts of a currency.
- Study free educational material. Forex trading requires specialized knowledge but there are several online courses that teach the ins and outs available for beginners.
- Open a free demo account and practice. Before using real money, open a free demo account that allows you to use the trading platform and learn how it works before making an actual deposit.
- Learn to use the trading software.
- Develop a trading strategy. A trading strategy will help to set some guidelines for trading and should be based your specific situation and finances.
- Deposit the smallest allowed amount of risk capital.
- Check your positions at the end of each day to ensure you have no pending positions to be filled out and are left with sufficient cash to make future trades.
- Cultivate emotional equilibrium: Beginner forex trading is akin to an emotional roller coaster, so do not get carried away across profits and losses but stay disciplined about closing out positions when necessary.
- Decide how much you are willing to risk on each trade, setting your leverage ratio in accordance with your needs, and don’t risk more than you can afford to lose.
- Be Able to Stop Along the Way: You can’t watch the markets every minute of every day, so manage your risk and protect potential profits through stop and limit orders.
Story by Louis Schoeman