#1: Know Who Regulates Your Prospective Broker

Trust me – you want someone looking over your broker’s shoulder. It’s in your best interest that someone is watching your broker. That means that your forex broker must be regulated by one or more entities that ensure strict regulation.

The good news is it’s easy to know if your broker is regulated or not. Just check their location.

If your broker is regulated by authorities in the United States, United Kingdom, Canada, Hong Kong, Japan, Switzerland or Australia, then you can be reasonably certain your broker is properly regulated. And if your broker just does business in any of these places, he should be properly regulated.

However, if your broker is in Cypress, Belize or places like this, then you need to check and double check to make sure your funds are safe.

So I suggest choosing a highly-regulated broker based out of one of the well-regulated countries above.

After all, would you want to live in a city with no police? How about a very small, lax police force in a huge city? Personally, I wouldn’t want either one of those. But that’s what you have if you choose an FX dealer in the wrong country.

#2: Make Sure Your Broker Has the Funds to Back You

Next step: Make sure your FX dealer has the funds to stay in business over the long haul.

But this is much easier than it sounds. If you chose a broker from a highly regulated country, then it’s very likely that this broker already meets the minimum capital requirements to do business.

The only consideration that remains is whether your potential Forex broker has deep enough pockets to cover millions of dollars in trading, or is it a relatively new firm that barely meets the minimum capital requirements?

For instance, here in the U.S. back in 2009, the National Futures Association (NFA) ramped up the net capital requirements for U.S. forex firms. To stay in business, all FX firms now must have at least $20 million in assets.

That killed a lot of the small fish here in the United States. So be sure to ask how much your firm holds in excess cash reserves.

Also keep in mind there are some monster whales in the United States that have $125 million or more in cash. With these huge FX dealer firms available, I suggest you go with one of the largest, well-capitalized firms.

#3: Use a Firm that Does Business the “Right Way”

The final question you should ask is: “How does your prospective broker do business?”

Do they care about their clients?

In the forex-trading world, that usually comes down to another question: Is your prospective broker a “dealing desk broker” or a “no-dealing desk broker?”

Dealing desk brokers take the other side of your trade. In other words, if you buy the EUR/USD, they will sell the EUR/USD. So your loss is their gain.

On the other hand, your gain is their loss. See the potential for conflicts of interest?

No-dealing desk brokers do not take the other side of your trade. They typically have a “pass through” model of doing business. That means they take your order and pass it through to one of the major interbanks.

They get paid a small fee regardless, so they don’t care if you win or lose on your trade. Your loss is not their gain.

However, ideally they’d want you to win, because winners continue trading longer. These brokers earn their living when you trade, so they want you to trade for a long time. I prefer this type of “no-dealing” broker for that very reason.

So when you are looking into a broker … don’t just look at how pretty their Website is or how many bells and whistles they have.

Determine whether or not they are regulated, where they are regulated, and to what degree. Find out how much excess capital they have after meeting their regulator’s minimum requirements. Then make sure they have a “no-dealing desk” business model.

For more on this subject go to http://www.thetradingreport.com/2011/07/29/retail-currency-investing-the-three-secrets-to-success/

Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.

I thought the below article was a good read for new forex currency traders and new learners in the Forex Currency Market. The article is written by one of my favorite authors, Cory Mitchell.

Every once in a while, many smaller economic and market events combine to set off a currency meltdown. These meltdowns can be financially devastating to some – but at the same time, someone else is making money. While there have been many currency meltdowns of differing magnitudes, the ruble, euro, pound and kiwi have had their day in the speculative sun. The events that led to these meltdowns and the effects on the world and currency trading that these meltdowns had are important issues that should be remembered. Each currency meltdown offers insight into how traders could have avoided big losses or made big money. (Flying high one day, but not the next – see the stories behind some spectacular financial meltdowns. Check out Massive Hedge Fund Failures.)

Ruble Meltdown
The 1998 Russian Financial Crisis hit on August 17, but it had been brewing since the Asian financial crisis took hold in July. There were many factors that played a role in the demise of the Ruble – not to mention the pounding it gave the stock and bond markets – and an artificial exchange rate that required the Ruble to stay within a pre-set band with the USD was one of them. There was also the Asian crisis and falling demand and prices for crude oil weighing on the Russian economy. In the middle of this mess, skyrocketing interest rates to prompt external inflows showed weakness instead of inspiring confidence, and debts to workers (many of them miners) continued to grow. The Russian situation was a cause for massive and widespread concern.

Between May and August, stock, bond and currency markets collapsed, severely damaging countries involved with Russia. The damage was particularly devastating to the smaller economies intertwined with Russia. Major banks failed and a moratorium was placed on payments to foreign creditors.

Shaking Out the Ruble
With the exchange rate artificially pegged, it took time to adjust. On August 17, the trading band was expanded from 5.3 – 7.1 to 6.0 – 9.5 rubles per Dollar. From August 17 to August 25, the currency depreciated from 6.43 to 7.86 and then quoting stopped. On September 2, the ruble was floated freely and, by September 21, the rate reached 21 rubles per dollar.

The major result of the crisis was that the currency was allowed to float freely, and thus could potentially dampen the effects of future crises. Russia recovered relatively quickly due to the rapid rise in oil prices seen through 1999 to 2000, and strong domestic industry which benefited from the devalued ruble.

The fallout and devaluation of the ruble was not unexpected. It was there for all the world to see, and there were speculative “attacks” on the currency starting in 1997 as the Asian crisis took hold. These traders made a lot of money, but a trader didn’t need to be the first in to make money. There was ample time to get in before the currency was floated.

Euro Meltdown
The 2010 euro debt crisis saw the euro decline over 20% from December of 2009 to June of 2010, as many speculators began to predict that the members of the European Union would not be able to operate under the same currency.

The crisis was largely more of a scare than an actual meltdown, and was fostered by contagion fears from Greece. Greece had a fast-growing economy from 2000 to 2007, increasing at a 4.2% annual rate, but the financial crisis in 2008 severely hurt the Greek economy. Greece was found to have massaged statistics and deliberately misreported financial figures to hide true debt levels in order to stay within monetary union guidelines. In 2009, debt estimates to GDP were at 6%, but by May of 2010, those estimates were at 13.6% – one of the highest in the world.

Europe at Risk from the Greek Contagion
The spread of the crisis in Greece to the rest of the Eurozone was of prime concern. Ireland required a bail out in December of 2010, and Spain, Portugal, Belgium, Estonia and Slovenia all faced debt issues or were hard hit by the former global financial crisis. If the contagion of Greece spread, speculators thought it was questionable whether or not these countries could sustain themselves or would face the same fate as Ireland.

The euro was the whipping boy of such concerns as debt downgrades plagued the region. As a result, bonds were put under pressure in suspect or economically weak countries and the euro declined against major currencies. Bailouts occurred as multiple bills and packages were put together by local and international governments, as well as global organizations like the International Monetary Fund. Those traders who saw the problems in Greece, and realized the impact a contagion might have, began a speculative attack on Greek bonds and sold the euro short.

While there were serious concerns and issues in individual countries, the euro was back near pre-crisis by April of 2011, as the corrective measures by the European Union stabilized and increased the value of the currency.

Breaking the Pound
Black Wednesday, which took place on September 16, 1992, is infamously known as the day George Soros made US$1 billion by shorting the pound prior to the British government being forced to withdraw from the European Exchange Rate Mechanism (ERM). The ERM was a monetary and economic policy tool that would attempt to keep the pound from fluctuating more than 6% from other member currencies. Leading up to September 16, speculators and dealers sold pounds in anticipation that the pound would be unable to stay above the lower threshold set by the ERM. (Find out where the Soros trade ranks in The Greatest Currency Trades Ever Made.)

The selling of pounds was due to several factors, including an inflation rate of three times that of Germany, as well as current account deficits and budget deficits. The high interest rates, inflation and laxity in government were due to what has been called the “Lawson Boom” – named after Chancellor Nigel Lawson who fostered an environment of rapid expansion and ushered in an age of inflation. Other European countries began protesting the use of the ERM and that put additional selling pressure on the pound as Britain now had to follow a policy that it likely could not implement.

A Currency Hail-Mary
Joining the ERM was an attempt to stabilize the economy and currency of Britain by linking to non-inflationary economies such as Germany. Speculators saw this as a superficial move that didn’t correct the inherent problem, so the attempts of government to hold the pound above the lower band would fail. The Treasury tried buying pounds to stabilize and prop up the falling currency, but to no avail.

Interest Rate Hikes
The government raised interest rates from 10 to 12% on September 16, but this only made pound sellers more confident Britain was in trouble. In a last ditch effort, on that same day, the government said they would raise interest rates to 15%, although this never actually took place as the announcement had little effect in supporting the fall. By that same evening, Britain announced it would leave the EMR. That September, the GBP/USD dropped by 15%. Between September and December of 1992, it fell nearly 30% in total.

Leaving the EMR changed the country, so September 16 carries a controversial second name of “Golden Wednesday,” as it was the day that ushered in the possibility of economic revival. (Currency trading offers far more flexibility than other markets, but long-term success requires discipline in money management. See Forex: Money Management Matters.)

Kiwi Raid
While George Soros is often the man who traders think of when the subject of “great currency raids” comes up, the trade by Andrew Krieger in the kiwi also deserves attention. Interestingly, after Krieger’s raid – carried out while Krieger was employed at Bankers Trust – he went to work for George Soros because Bankers only paid him a $3 million bonus for the profits he rang up.

Krieger’s shorting rampage against the kiwi occurred in 1987, after the infamous stock market crash. During this time, other traders were bidding up currencies appreciating against the USD. Krieger saw that some of these currencies were inflated, mainly the NZD, and began to short the kiwi using options. This gave him massive leverage and enabled much larger positions than would be available if he had simply been dealing in the cash markets. By Krieger’s own reports, he shorted the entire money supply of New Zealand and forced the market in his direction.

Crushing the Kiwi
The massive selling pressure saw the kiwi lose more than 5% in a single day, with fluctuation up to 10% in the ensuing chaos. Krieger took an approximate $300 million gain from the trade, which is why he was so disgusted when Bankers Trust only handed him a $3 million bonus.

Things did eventually settle down, but Krieger and Bankers Trust made a lot of money by realizing that currencies, especially the kiwi, were overvalued after the 1987 stock crash. Panic from the crash had caused a short-term mis-allocation of funds that would have likely corrected on its own over time – Krieger made it happen in a very short time, and collected a handsome paycheck for doing so.

Bottom Line
There will always be times when currencies fall prey to speculative attacks, although often these attacks are simply the market (participants) indicating their dissatisfaction with what is occurring in a given economy at the time. Governments are required to be fiscally responsible and maintain a balance within the economy it governs. When central banks, treasury departments and governments fail to control and tame a situation, it becomes a crisis. Often these crises are not hard to see, but the magnitude of the problem may be shrouded. As Krieger and Soros show us, and the Euro and Ruble reiterate, when a country is facing issues, it is best to stay away from buying or wait for an opportunity to short it and make money. (This market can be treacherous for unprepared investors. Find out how to avoid the mistakes that keep FX traders from succeeding. Check out Top Reasons Forex Traders Fail.)

Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.

I thought the below article was a good read for new forex currency traders and new learners in the Forex Currency Market. The article is written by one of my favorite authors, Marc Davis .

Part-time forex trading can be a successful way to supplement your income, no matter what your situation or schedule. Even if you work full time or hold a part-time job, you can find the time to trade in this potentially profitable market. Read on for some tips to help get you there.

The Keys to Success in Forex
The key to successful forex trading is to specialize in the currency pairs that trade when you’re available for trading, and to use strategies that don’t require constant portfolio monitoring. An automated trading platform may be the best way to accomplish this, especially for new traders or those with limited experience.

1. Find the Right Pairs to Trade
Although forex trading occurs 24 hours a day throughout the week, it’s best to trade during peak volume hours to guarantee liquidity. Liquidity is a trader’s ability to sell a position, which is much easier to do when the market is most active. Assuming that you work a nine-to-five job, you’ll be available for trading either early or late in the day. Depending on the currency pairs you’re trading, high volume may occur at either end of the day. Either time may be the right time to trade.

For small traders with mini accounts and beginners who lack experience, experts advise trading U.S. currency against various foreign currencies. Even more experienced traders prefer trading U.S. currency against other foreign currencies, although many knowledgeable forex traders will also trade foreign currency pairs.

The great majority of dollar volume traded on forex markets occurs in the currency pairs below. Because of good liquidity in these pairs, it may be wise for part-time traders to restrict trading to these briskly traded currencies. (For more information on global currencies, read Top 8 Most Tradable Currencies.)

•USD/EUR
•USD/JPY
•USD/GBP
•USD/CHF
•USD/CAD
•USD/AUD

For part-time traders with more experience, and with time to research conditions and circumstances that may impact currency prices, the following pairs also offer high liquidity.

•EUR/GPB
•EUR/JPY
•EUR/CHF

Because the part-time trader has a limited time during which to trade, experts advise trading only the USD/EUR pair. This pair is most frequently traded, and there’s an abundant amount of readily available information on these currencies in print, broadcast and internet media.

Conversely, experts discourage part-timers from trading two foreign pairs that may require more sophisticated knowledge, and for which information may not be readily available. (To learn more about trading the U.S. dollar, check out Play Foreign Currencies Against The U.S. Dollar – And Win.)

2. Set Up an Automated Trading System
Part time traders may opt to trade on their own, or choose an automated trading program to make trades for them. (For more on automated trading systems, see Forex Automation Software For Hands-Free Trading.)

There’s a variety of automated trading programs with a full spectrum of functions available on the market. Some of them may be able to monitor currency prices in real time, place market orders (impose limit, market-if-touched, or stop orders), recognize profitable spreads and automatically order the trade. Please note, however, that even if a trade is ordered, there’s no guarantee that the order will be filled on the trading floor at the price expected, especially in a fast-moving, volatile market.

A so-called “set and forget” program may be the best way for a beginning part-time trader to start learning about forex trading, and allow the software to make the automated decisions. Several automated programs offer a simple “plug and play” capability – an easy way for part-time beginners to start trading. This in one of the major benefits of automated trading – disciplined, unemotional trades. More-experienced part timers may prefer a more hands-on trading approach, and choose automated trading software with more programmable options. (To learn more, see Forex Automation Software For Hands-Free Trading.)

3. Apply Dispassion and Discipline
For traders who make their own trading decisions rather than relying on an automated system, discipline and dispassion are essential for success. Part-time traders are advised to take profits when they materialize instead of anticipating wider spreads and bigger profits. This requires a degree of self-discipline in fast trending markets in which favorable spreads are widening. Because a trend can turn around instantly and be influenced by some external event that a part-time trader may be unaware of, successful traders take profits when they can. Trailing stop and stop market orders may be imposed to protect against sudden market reversals and to minimize risk. But as mentioned previously, there’s no guarantee that an order will be filled at the anticipated price. (For tips on how to analyze your trading and improve, read 4 Reasons Why You Need A Forex Trading Journal.)

Part-time traders with little or no experience are advised to start trading small amounts of currency. By opening a mini forex account, which requires a smaller-than-standard cash deposit, traders can control 10,000 currency units. The standard currency lot controls 100,000 units of currency. Minimum cash deposits for a mini account may start at $2,000 and can be as high as $10,000.

With the leverage offered to traders, which can run as high as 400-to-1, potential profits and losses can be substantial. Leverage is defined as borrowed money, obtained from lending institutions or brokerage firms, which allow traders to buy currency lots on margin. In other words, leverage permits traders to put up only a fraction of the cash represented in a currency lot. For example, with 1% margin, only $1,000 is required to trade a currency lot worth $100,000. (For more insight, check out Forex Leverage: A Double-Edged Sword.)

Finally, never put more money at risk than you can afford to lose.

The Bottom Line
Successful part-time forex trading is a matter of discipline, dispassion and trading the right currency pairs at the right time of day. For the beginner, an automated trading program is probably the best way to break into forex trading, at least until the neophyte trader becomes more familiar with trading procedures and possibilities.

Like any aspect of investing or speculating, there’s no guarantee that you’ll make a profit. However, smart, knowledgeable, experienced traders – and even beginners at forex trading – will have a better chance at making money if they follow the few simple principles described above. (Aspiring forex traders can start by reading Forex Trading: Using The Big Picture.)

Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.

I thought the below article was a good read for new forex currency traders and new learners in the Forex Currency Market. The article is written by one of my favorite authors, Richard Lee .

Inflation is inevitable. Any economy that sees growth will experience it, and consumers pay for it through higher priced goods. But what can be done about it? (To read more, check out, Fight Back Against Inflation.)

Plenty – when it comes to central banks. Global central bankers have had to deal with inflation and all sorts of other monetary forces through the years. In response, policy makers have had to increase the number of strategies for fighting inflationary pressures – from monetary policy changes (like higher interest rates) to derivative transactions. These strategies help to calm the rapid rise in prices when they are implemented, but they can also provide longer term clues for foreign exchange investors.

Raising the Interest Rate
Raising benchmark interest rates is the preferred plan of action when it comes to the central bank’s fight against inflation. Why? It’s the easiest and simplest strategy, and the results can sometimes be quicker compared to other methods. All a monetary body does, in this instance, is increase the benchmark that most commercial and retail banks refer to when creating client loans. These products include mortgage, student and car loans, along with commercial loans for businesses. Once these rates rise, the cost of money increases. This isn’t a good thing for customers or companies. (For more on the relationship between interest rates and inflation, see Understanding Interest Rates, Inflation And The Bond Market.)

Foreign exchange investors are always on the hunt for this opportunity.

Global investors constantly search for high interest rate returns combined with relatively low risk. The same goes for foreign exchange investors. So, when a central bank elects to raise rates, you can be sure that demand for that currency will rise. For example, the Australian dollar benefited from this phenomenon beginning in June 2010. The central bank of Australia raised rates several times between late 2009 and early 2011. By January 2011, the Australian dollar had risen by 26% compared to the U.S. dollar in response,

As the Australian economy rebounded quickly amid a slumping global economy, the country’s central bank was forced to raise rates more than once – by 25 basis points each time – in order to fight inflation. The decisions led to higher demand for the Aussie, especially against the U.S. dollar, during that time. (For more information on the U.S. and Australian dollar, see Play Foreign Currencies Against The U.S. Dollar – And Win.)

Tweaking Reserve Requirements
An equally effective strategy for central banks is to raise the reserve requirements of banking institutions.

When a central bank elects to raise the reserve requirements, is limiting the amount of money or cash in the system – referred to as the monetary base. An increase in the reserve requirement increases the minimum cash reserve that a commercial bank is governed to hold, so this adjustment prevents the bank from lending out that cash. This restriction of money will slow the rise in prices as there will be less money chasing the same expensively priced goods (hopefully suppressing demand). The Chinese government favors this policy due to its own semi-fixed currency policy. Since the beginning of 2011, the People’s Bank of China has elected to raise the reserve requirement three times – increasing the rate by 50 basis points each time.

The decision to raise reserve requirements should eventually slow down the inflation of a nation’s currency. More often than not, such a decision also helps to fuel the foreign exchange rate’s upward trend in value due to speculators. So, the central bank’s decision holds significance for the foreign exchange investor.

By increasing the reserve requirement, the central bank is acknowledging that inflation is a problem and is aggressively dealing with it. However, this could increase a currency’s attractiveness to forex investors, as they anticipate another round of reserve requirement increases. As the supply of money thins – a result of higher reserves held by banks – speculation helps to support and even propagate a higher currency valuation (thus lowering inflation). Referring back to the Chinese yuan, the effects of speculative demand are apparent: The currency gained by almost 4% following a series of reserve rate increases from June 2010 to January 2011, as speculators anticipated further reserve quota increases for Chinese domestic banks. (For more on the U.S. dollar and the Chinese yuan, see Why China’s Currency Tangos With The USD.)

Open Market Operations
Global central banks also conduct open market operations to regulate money supply and ultimately control consumer inflation. Used by U.S. Federal Reserve officials, open market transactions are quite simple. Using their relationships with about 20 inter-market dealers, the Federal Reserve will transact in reverse repurchase agreements to temporarily reduce the supply of money or conduct overnight repurchase agreements to temporarily create supply. (To read more on how the Fed does, check out The Fed’s New Tools For Manipulating The Economy.)

Yes, these operations do have an impact on foreign exchange rates as they are typically made in support of a longer term decision. For example, if central bankers are siding with an interest rate increase, they will subsequently be looking to use reverse repurchase agreements to further withdraw the system’s money. As a result, foreign exchange investors will always be keeping an eye out for these announcements to ensure the current monetary tightening theme remains intact.

Currency Appreciation
Last but not least, central banks will resort to simple currency appreciation in fighting consumer prices.

This strategy is typically used only by governments that offer fixed or pegged currencies, simply because they are able to effectively control the currency’s exchange rate. The reason for this strategic choice is simple. Consumer prices typically rise as producer input costs – or raw material prices – increase. In order to mitigate higher producer prices, central bankers will allow a stronger currency to decrease the exchange-rated price of these inputs. This will effectively bring down consumer prices as producers pass along lower market prices to the customers.

For example, a barrel of oil priced at $100 a barrel will cost 700 yuan at an exchange rate of 7 USD/CNY. But if the yuan strengthens to 3 USD/CNY, the same barrel of oil will only cost 300 yuan. That’s the equivalent of the price dropping to about $43 a barrel. (Read, Get To Know The Major Central Banks for more on central banks.)

Currency investors will see this as an opportunity. Fixed or pegged currency appreciation will only add to the underlying strength of the currency going forward. Why? Market demand will continue to outstrip supply as expectations of similar moves in the near term increase.

Singapore’s economy adopted this policy in 2007-2008, as consumer inflation rose by an average of 6% and GDP grew by 10% during that time. Since then, the underlying currency (the Singapore dollar) has risen by 13% against the U.S. dollar. The Monetary Authority of Singapore widened the Singapore dollar’s trading band in order to compensate for rising consumer prices. As expected, speculation of further flexibility in the trading band helped the country’s currency to appreciate. (For more on the Asian markets, check out Introduction To Asian Financial Markets.)

The Bottom Line
By raising interest rates, increasing reserve requirements and applying up-to-date monetary tools, today’s central banks have plenty of strategies to consider when fighting inflation. The timing and announcement of these strategies can present great opportunities for foreign exchange traders who are willing to keep their eyes on global monetary policy. (For further information, see The Currency Market Information Edge.)

Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.

I thought the below article was a good read for new forex currency traders and new learners in the Forex Currency Market. The article is written by one of my favorite authors, Kathy Lien.

Whenever you devote money to trading, it is important to take it seriously. For traders who are getting into the forex (FX) market for the first time, it basically means starting from square one. But new traders don’t have to be left in the dark when it comes to learning to trade currencies; unlike with some of the other markets, there is a variety of free learning tools and resources available to light the way. You can become FX-savvy with the help of virtual demo accounts, mentoring services, online courses, print and online resources, signal services and charts. With so much to choose from, the question you’re most likely to ask is, “Where do I start?” Here we cover the preliminary steps you need to take to find your footing in the FX market.

Finding a Broker
The first step is to pick a market maker with which to trade. Some are larger than others, some have tighter spreads and others offer additional bells and whistles. Each market maker has its own advantages and disadvantages, but here are some of the key questions to ask when doing your due diligence:

Where is the FX market maker incorporated? Is it in a country such as the U.S. or the U.K., or is it offshore?
Is the FX market maker regulated? If so, in how many countries?
How large is the market maker? How much excess capital does it have? How many employees?
Does the market maker have 24-hour telephone support?

In order to ensure that the money you are sending will be safe and that you have a jurisdiction to appeal to in the event of a bankruptcy, you want to find a large market maker that is regulated in at least one or two major countries. Furthermore, the larger the market maker, the more resources it can put toward making sure that its trading platforms and servers remain stable and do not crash when the market becomes very active. Third, you want a market maker with a larger number of employees so that you can place a trade over the phone without having to worry about getting a busy signal. Bottom line, you want to find someone legitimate to trade with and avoid a bucket shop.

Checking Their Stats
In the U.S., all registered futures commission merchants (FCMs) are required to meet strict financial standards, including capital adequacy requirements, and are required to submit monthly financial reports to regulators. You can visit the website of the Commodity Futures Trading Commission (an independent agency of the U.S. government) to access the latest financial statements of all registered FCMs in the U.S.

Another advantage of dealing with a registered FCM is greater transparency of business practices. The National Futures Association keeps records of all formal proceedings against FCMs, and traders can find out if the firm has had any serious problems with clients or regulators by checking the NFA’s Background Affiliation Status Information Center (BASIC) online.

Test Drive
Once you’ve found a broker, the next step is to test drive its software by opening a demo account. The availability of demo or virtual trading accounts is something unique to this market and one that you’ll want to exploit to your advantage. Your goal is to learn how to use the trading platform and, while you’re doing that, to find the trading platform that suits you best. Most demo accounts have exactly the same functions as live accounts, with real-time market prices. The only difference, of course, is that you are not trading with real money.

Demo trading allows you not only to make sure that you fully understand how to use the trading platform, but also to practice some trading strategies and to make money in the paper account before you move on to a live account funded with real money. In other words, it gives you a chance to get a feel for the FX market. (To learn more, see Demo Before You Dive In.)

Do Your Research
When you trade, you never want to trade impulsively. You need to be able to justify your trades, and the way to find justification is by doing your research. There are many books, newspapers and other publications with information about trading the FX market. When choosing a source to consult, make sure it covers:

The basics of the FX market
Technical analysis
Key fundamental news and events

Because the FX market is primarily a technically driven market, the best book that you can read as a new trader is one on technical analysis. The better you get at technical analysis, the better you can trade the FX market from a speculative perspective. (For further reading, see our Introduction To Technical Analysis.)

When it comes to newspapers, seasoned foreign exchange traders typically refer to the Financial Times and the Wall Street Journal simply because they contain international news. Trading FX involves looking beyond mere economics, since politics and geopolitical risks can also affect a currency’s trading behavior. Therefore, it’s also important to keep up with major non-financial news sources such as the International Herald Tribune and the BBC (online, on TV or on the radio) for the big stories of the day.

One of the most popular magazines among FX traders is the Economist, because it covers many macro themes; however, currency-specific and trading magazines are also popular.

Once you have a solid foundation in FX trading, you need to keep up to date on daily fundamental and technical developments in the FX market. A variety of free FX-specific research websites, which can be found easily on the internet, will do the trick.

Education and Mentoring Programs – Are They Worth It?
The benefit of online or live courses over books, newspapers and magazines is that you can get answers to the questions that perplex you. Hearing or seeing other people’s questions is also extremely valuable, since no one person can think of every possible question. In a classroom setting, either online or live, you can learn from the experiences and frustrations of others. As for a mentor, he or she can draw on personal experience and hopefully teach you to avoid the mistakes he or she has made in the past, saving you both time and money.

What About Trading Systems and Signals?
Many traders wonder whether it is worthwhile to buy into a system or a signal package. Systems and signals fall into three general categories depending on their methodology: trend, range or fundamental. Fundamental systems are very rare in the FX market; they are mostly used by large hedge funds or banks because they are very long term in nature and do not give many trading signals. The systems that are available to individual traders are typically trend systems or range systems – rarely will you get one system that is able to exploit both markets, because if you do, then you have pretty much found the holy grail of trading.

Even the largest hedge funds in the world are still looking for the switch that can identify whether they are in a trend or a range-bound market. Most large hedge funds tend to be trend following, which is why hedge funds as a group did so poorly in 2004, when the market was trapped in a tight trading range. Range-bound systems will only perform well in range-bound markets, while trend systems will make money in trending markets and lose money in range-bound markets. So, when you buy into a system or a signal provider, you should try to find out whether the signals are mostly range-bound signals or trend signals. This way you can know when to take the signals and when to avoid them.

Trading Setups – Finding What Works Best for You
Every trader is different, but the best trading style is probably a combination of both technical and fundamental analysis. Fundamentals can easily throw off technicals, while technicals can explain movements that fundamentals cannot. Smart traders will always be aware of the broader fundamental picture while using their technicals to pinpoint good entry and exit levels; combining both will keep you out of as many bad trades as possible, and it works for both day traders and swing traders. Most free charting packages have everything that a new trader needs, and many trading platforms offer real-time news feeds to keep you up to date on economic news. (For further reading, see Devising A Medium-Term Forex Trading Strategy.)

Conclusion
Learning to trade in the FX market can seem like a daunting task when you’re just starting out, but thanks to the many practical and educational resources available to the individual trader, it is not impossible. Learning as much as possible before you put actual money at risk should be at the forefront of your agenda. Print and online publications, trading magazines, personal mentors, online demo accounts and more can all act as invaluable guides on your journey into currency trading.

I hope the above article was of help to you.

Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.