For those who want to try something else other than stock trading or investing, forex trading sounds like an exciting new financial opportunity for beginners to dip their toes in.
As Forex trading has one of the largest financial markets in the world, it is incredibly popular with traders internationally, especially since it allows for the opportunity to take advantage of face-paced moving markets.
It also allows novices to compete head-to-head with larger hedge funds and financial institutions. To start forex trading, one must apply and set up a forex account with a broker.
Here are a few of the main steps outlined below on how to set up a forex trading account. Be sure to do your research so you are prepared before entering the world of forex trading.
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What is Forex Trading?
For a little refresher, the term ‘forex’ (FX) is a portmanteau of the words ‘foreign exchange.’ This refers to the global marketplace where investors trade currencies and currency derivatives.
In layman’s terms, foreign exchange is the process of exchanging one currency for another and is usually used for tourism, trading, or overseas commerce and business.
As there is no central physical trading location, the forex market is one of the most liquid and largest markets in the world, with trillions of dollars being exchanged daily.
All transactions take place over computer networks among traders, rather than through a centralized exchange. According to a 2019 report by the Bank for International Settlements, trading in the forex market reached $6.6 trillion per day in April 2019.
Moreover, unlike stock exchanges that have set trading hours, the forex market is open 24 hours a day, five days a week.
This means that currencies can be bought or sold virtually anytime, with price quotes fluctuating constantly. Major forex exchange markets include London, New York, Hong Kong, Singapore, as well as Sydney.
Currencies are generally traded in pairs, such as EUR/USD, or USD/JPY. The three-letter initials represent the currency being traded.
A quotation is then given, for example, EUR/USD =1.2500. The first currency is the base currency, and the second one is the quote currency. This means that 1 Euro can be traded for 1.25 US dollars.
Forex trading is usually driven by speculation, as traders can find opportunities in rising and falling markets. For instance, if a trader believes the price of a currency will rise in the future, they can buy it now and then sell it once the price increases.
Vice versa, if they believe the price will fall in the future, they can protect themselves from loss by selling it at a higher price.
Find a forex broker
Before you get started with forex trading, you must get in touch with a forex broker. Much like a stockbroker, they are financial service providers through which you buy and sell currencies.
The forex broker will act as an intermediary between traders and the global market when it comes to trading currencies.
However, not all brokers are created equal. It remains imperative that retail traders carefully research what services the broker provides and what reputations they have before committing with them to open a forex trading account.
If you have no idea where to start, you can try checking with local and national regulatory agencies that may inform you if the particular broker has a history of shady practices.
If you are forex trading in Australia for instance, you can check with the Australian Securities and Investments Commission (ASIC) to see if the broker is authorized and approved.
Remember to compare your prospective broker’s fees and services, as some may offer more sophisticated trading platforms with analytics, while others may have a simpler package.
Some brokers might also have additional fees added alongside their main commission. This way, you can find what broker provides the most value for your money.
Things to consider before opening an account
Before diving straight in, there might be a few things you want to consider. Some of these questions you will want to ask yourself include:
- How willing are you to take risks?
- How much time can you set aside to trade?
- Can you access any advanced trading tools?
- How much do you want to initially deposit?
- What are your objectives for forex trading?
Depending on how risk-averse you are, or how much you are willing to pay upfront, this might influence the type of forex trading account you open.
For example, if you are willing to take larger risks, then a standard account might be suitable for you. If you feel comfortable taking as little risk as possible, then a micro account might be better.
Additionally, if you know exactly what your objectives are when it comes to forex trading, you can better plan a strategy to help you meet your financial goals.
Typical requirements when getting started
When you finally get to setting up an account with a forex broker, you will have to provide personal information to do so. These include:
- Name, address, phone number, email, date of birth, country of citizenship
- Account currency type
- Password for your trading account
- Tax ID
- Employment status
- Annual income
- Net worth
- Trading experience
- Trading objectives
Also, check out – Forex trend indicators
Procedure for opening an account
Although the exact steps revolving around opening a forex account vary depending on the broker, it typically involves a few major steps:
- Head to the broker’s website and complete an application form.
- After completing your application, you will be given a username and password that will allow you to access your new account.
- Log in through your broker’s client portal.
- Transfer funds from your bank account to your new forex trading account. This can be done through cheque, credit or debit card, or electric transfer.
- Once your account has money in it, you can start forex trading. Be sure to take a look at any recommendations or special details regarding your particular trading platform. Some brokers might also offer demo accounts so novices can practice forex trading without the pressure of using real money when making a trade.
Types of forex trading accounts
There are a few different accounts a trader can choose from when they want to start forex trading. This depends on how much you are prepared to risk and how much you want to trade.
Be sure to take the time to research each account’s advantages and disadvantages, and whether they suit your objectives.
- Mini/Micro accounts: Geared towards beginner traders, it allows them to trade using smaller trading quantities that lower the risk of potential losses. However, restrictions are often placed on the size of trades to control risk. This account only lets traders enter into contract sizes of 10,000 units, which is one-tenth of a standard account.
- Standard accounts: This is usually referred to by different names, such as ‘Classic’, ‘Intermediate’, or ‘Premium’. However, these are just simply regular accounts offered by brokers. Standard accounts let traders enter into contract sizes of 100,000 units. Traders also tend to get better services and perks, however, this means traders must maintain a minimum balance. They are mainly recommended for experienced forex traders.
- Managed accounts: While a trader puts the money into an account, the trading decisions are all made by the manager of that account. An investor simply gives them their objectives and goals, and the managers will work to meet those goals. These accounts are often divided into two types: individual accounts and pooled funds. Pooled funds are where money is placed in a mutual fund with other investors. Whereas individual accounts are managed by a broker who handles one specified account. While you do not need to worry about strategy and trading, these accounts have high monthly maintenance fees and commissions. You must also put a lot of trust in your manager.
Demo Accounts: These are not true accounts, but are free training accounts provided by many brokers. These accounts allow novices to begin experimenting with virtual currency in real-time market conditions. Beginner traders can then try out strategies and get to know the trading platform’s interface and tools.
There is no risk in using a demo account, making it a great learning opportunity. However, it is recommended that traders only use it as a tutorial, and should eventually make the switch to an actual account to start trading with real money.
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