How To Trade Forex
Buy Or Sell?
All decisions on how to trade forex in the foreign exchange markets are based on predictions of changes in price. You would never trade without having some reason to believe that the price of a currency pair will either rise or fall.
So how do you know which way the price will move? Of course, this is the million dollar question of forex trading!
There are two ways that traders arrive at a belief that the price is about to change in one direction or another.
These methods are called ‘fundamental analysis’ and ‘technical analysis’. Some traders rely more on one than the other, but most use a combination of the two.
Fundamental Analysis (Simpler Than It Sounds)
If you base a trading decision on fundamental analysis you are considering economic and financial factors. For example, if you thought that the American economy was in a precarious state and likely to suffer a crash, you might decide to buy the EUR/USD pair. But if you believed that the US economy was strong and the euro was likely to weaken, you would sell the pair.
If you rely mainly on fundamental analysis you have to keep a close eye on the financial news for both of your currencies. This means looking beyond your own national news. Now that we have the internet it is easy to do this online. Most brokers also send out alerts of breaking forex news which can help to keep you up to date.
So what happens if you do not have thousands of dollars, euros or whatever to trade with?
It’s OK! The forex market uses margin trading so that you can control 50, 100 or even 200 times the amount that you actually have to commit in your account.
This means you can place an order for $10,000 worth of currency with just $100 or even $50. You are trading borrowed capital, and your broker loans you the rest. So you can deal in large transactions quickly and cheaply with only a small investment of your own.