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You may have heard that big money can be made by trading on the foreign exchange market. In fact there are a lot of wild claims about the fortunes that can be made on the forex market. There is a grain of truth to these claims, but it does not mean that you should just rush in impulsively. You should take the time to learn forex trading and understand exactly what it is all about so you’ll know how to take the best advantage of its profit opportunities.

Foreign exchange or forex currency trading involves the buying and selling of foreign currencies, which are traded in pairs; these units are called ‘currency pairs’. An example of a currency pair is USD/JPY = 100 (or US dollar and Japanese yen); the first currency is the base currency and the second the quote currency. The exchange rate is based on one unit of the base currency; thus, one dollar will buy one hundred yen.  In this example, the forex trader will make money if the dollar increases in value against the yen.

There are two common practices in forex market trading: day trading and swing trading. The difference can be found in the frequency of trading. In forex day trading, the trader will make multiple trades in one day, hoping to catch fluctuations in the exchange rate which will provide him the chance to make a profit. On the other hand, forex swing trading involves holding on to the currency for a longer period of time, say a few hours or even days, in the hope of catching larger fluctuations and making bigger profits.

Foreign exchange traders can also choose to trade in forex option contracts. Forex option trading involves a contract between a buyer and a seller in which the buyer secures the right (but not the obligation) to buy a curtain currency at a prearranged price, and on or before a predetermined future date. To secure this right, the buyer pays the seller a fee, which is called a ‘premium’. Option trading allows forex traders to take advantage of movements in a unpredictable market, but also to lock-in stable rates in markets bound within certain ranges.

An options trader can also trade using SPOT or Single Payment Options Trading. In SPOT, the trader identifies a scenario in the options contract, gets a premium quote from the broker, then makes a profit if the scenario takes place.

Which style you adopt when you trade forex depends on your understanding of the market and this is where a forex trading course is vital. Such courses are readily available online and will teach you all you need to know about currency trading. One very important thing you need to learn is how to trade using a trading strategy. The two main types of forex trading strategies are technical analysis and fundamental analysis. Trading with a strategy is vital since it increases your chances of successfully making a profit in the market.

Technical analysis involves looking at past trends of forex exchange rates to try and forecast their present movements. On the other hand, fundamental analysis looks deeper into the factors that could influence exchange rates movements; this includes the political and economic situation of a particular country and the global economic situation. Most traders use a combination of the two strategies, although many rely on technical analysis.

Once you have learned the essentials of foreign exchange trading by taking online forex trading courses, you should practice using a demo account. Such practice is essential since just diving into forex trading using live money usually results in the trader losing money on his first account. Traders can open demo accounts at an online forex broker. A broker is a company or individual that executes currency trades for their clients in exchange for a fee or a commission. A good broker is essential for those who want to go into forex trading.

Before deciding on a broker, there are several factors you should consider. First, is the broker regulated? Although the currency market is ‘unregulated,’ brokers should be a member of the National Futures Association and registered with the Commodity Futures Trading Corporation as a Futures Commission Merchant. This would protect the trader by ensuring that the broker is legitimate.

Second, what is the broker’s forex trading platform? A trading platform is software that is used both for trading analysis and to execute forex trades. Any good trading software should provide you with real-time exchange rate quotes and allow you to enter and exit the market quickly. These are minimum requirements for forex trading platforms and if your broker cannot provide you with these you should consider looking elsewhere. Also, many online brokers also offer free charting and technical analysis software bundled with the trading platform.

Third, what features do they offer? For example, any good broker should offer at least the seven major world currencies (the US dollar, the Japanese yen, the Euro, the British pound, the Canadian dollar, the Australian dollar and the Swiss franc) also many brokers will also trade in other global currencies. Also, what is their margin requirement? Trading on margin means that a trader needs to have only a small percentage (for example, 1%) of the amount he is trading in his trading account, with the broker accounting for the remainder. A small margin requirement means a bigger profit when a trade is good, but a bigger loss when a transaction goes sour. Finally, what is the minimum trading size? Transaction lots are usually measured in 1,000, 10,000 and 100,000 units, but some brokers offer odd lots which allow you to make your own lot size.

Fourth, how much are their fees, such as the transaction charge? The transaction charge is calculated in ‘pips’ or price interest point. A pip is the smallest increment a currency pair can move. A trader makes more money when the number of pips required by the broker is smaller.

So now that you have a broker, you have to decide on a system of trading. Forex trading systems are essential to the success of your currency trading. This is a very complicated process that requires you to be familiar with the technical indicators used to predict currency movements. Examples include Relative Strength Indicators (the ratio of upward movements to downward movements), stochastic oscillator (used to denote overbought or oversold conditions) and moving average divergence convergence (which indicates buy or sell signals through the convergence of two moving averages).

These technical indicators will be programmed into the trading platform to act as a filter for your trades. You will then look at forex charts for a daily, hourly and minute-to-minute basis to find trading signals. You should also place exit points, such as stop losses and take profits, to protect yourself from excessive losses. A stop loss order tells the broker to sell the currency pair when it reaches a certain price, while a take profit order means the currency is sold when it moves in a favorable direction.

Note that this system means that you will make the decision when to execute the trades by informing your broker. But many traders now swear by the use of automatic forex trading to perform their trades.

Automated forex trading uses software (which is euphemistically called a ‘robot’) into which the trader programs his trading system. The machine then uses the system to interpret market signals and make the decision when to buy or sell. The advantage of such a system is that it removes the human factor from the trades, since the decisions are made entirely through the technical indicators. It also removes the hassle from the trader of having to monitor his trades, a very important consideration given that the forex market trades twenty-four hours a day.

There are several factors to consider when choosing automatic forex trading software. One is how successfully it backtests. Backtesting involves testing a particular strategy using past data in order to see how effective it is. Of course, a successful backtest does not mean success in present trades, but it is still a significant indicator. Another is how successfully it does in live trading using a demo account.

You should also look at the robot’s track record. How long is its drawdown (temporary losing) period? An effective trading robot should have a drawdown percentage of only 15% or less. There are also the more basic factors such as how easy the software is to use, and if the developers express confidence in their product by offering a money-back guarantee.

There are many review sites online that compare the features of automated trading software that can be useful in helping you make your decision. Or you can ask your fellow traders which software they use and if they are happy with it. But the best way, ultimately, to make your decision is to try the software for yourself.

Automated forex trading software is good in as far as it prevents you from making impulsive trades that could cost you significant losses. But ultimately the software is only as effective as the strategy you program into it. And developing that forex trading strategy requires you to have a deep understanding of the currency market and how it works.