A foreign exchange (forex) trading business can be a great way to make money. As long as you know what you’re doing, the earning possibilities are practically limitless. If you don’t know what you’re doing, the consequences could be disastrous, as you might lose everything you put into the business. Prepare yourself for the forex trading business by following these tips when you’re ready to start out.
Become Familiar With the Regulations in Your Country
There’s not a single global body that regulates forex trading. Instead, each country has their own supervising divisions that make sure you’re following the rules. In the United States, these two regulating agencies are the National Futures Association (NFA) and the Commodities Futures Trading Commission (CFTC).
The job of these organizations is to limit leverage on certain currencies. For example, the United States has set limits of 50:1 on major currencies and 20:1 on minor currencies.
Open a Forex Brokerage Account
Before you can start trading, you’ll want a brokerage account with dedicated funds specifically for your business. There are several brokers you can do this with, all of which have different requirements and leverage rates. Some of the most popular options include Forex.com, FXCM, and eToro USA, which all have a minimum deposit of $50. If you’re afraid to risk that much, Oanda has a minimum deposit of just $1, while Citi is for bigger players, with a minimum of $10,000.
Study Trading Basics
There’s no legal minimum for starting a forex trading business, so you can add whatever you feel comfortable to your account as long as it meets the broker’s individual requirements. Whatever you do add, be sure never to risk more than 1 percent of your account on a single trade, as this puts you at risk for losing big.
Before you begin trading, though, you’ll need to understand the terminology. The forex market is measured in pips. So, if current EUR/USD rate is 1.3225, and it changes to 1.3226, it will have moved one pip.
This is important because it establishes how much value you have in your forex brokerage account. Each forex trade occurs in either 1,000, 10,000, or 100,000 units to keep things simple. These are aptly titled micro, mini, and standard lots respectively. Beginners should start with micro lots, as they involve the least amount of risk.
With this in mind, use a formula to calculate how much you can make if all goes well. Use the formula E = [1+(W/L)] x P – 1. W is the average of a successful trade, L is the average of a losing trade, and P is the percentage of how much your win your trades.
Stay Aware of Forex Scams
There are a lot of scams out there, so protect yourself by only working with brokers who are regulated by the NFA or the CFTC. If any company promises that you’ll have a return of over 30 percent in just two months, it’s most likely a scam.
Overall, forex trading is a great way to earn extra income. By studying up how to manage your money, you’ll build a successful forex trading business that will provide you with a comfortable return.