Before taking the time to choose a broker, it’s important to understand what, exactly, forex is and how it works. This way, you can make an informed decision based on what each broker offers.
Forex, short for foreign exchange, is the largest and most fast-paced market in the world. Many new traders find it much easier to understand than the stock market, making it a very popular choice. At its basis, it is simply exchanging one currency for another. In the past, only large companies or the extremely wealthy could participate, but technology has opened the doors for the average person to try their hand at it.
Most of the trading, because it is based on currency, is located in major cities like Tokyo or London with average daily volume often exceeding $3 trillion. Each trade made involves buying one currency while simultaneously selling another. The two together are known as a currency pair. For beginners, it is advised to start with one major pair to learn the trade as trying to manage a lot of different exchange rates can be confusing, especially when you’re not familiar with exchanging money in the first place.
When you go to trade, you’ll first come across the quote. An example would be USD/GBP – 20.20. The one to the left of the slash, USD, is known as the base currency while the one to the right, GBP, is the quote. All it means is that one USD will buy you 20.20 GBP and vice versa. The base is always equal to $1. Buying the base and selling the quote is known as a long position. The opposite is a short position.
Next, you must look at the bid and the ask prices. When you go to sell your base currency, the bid price is what you will be paid to sell. On the other hand, when you want to buy the base currency, the ask is what you will pay to get it. An example would be EUR/JPY = 1.5000/04. The bid price is 1.5000 and the ask price is 1.5004.
The last things to understand about the forex market are spreads and pips.
- In the forex, a spread is simply the difference between the buy and the ask. If the numbers given were 0.9000/04, then the spread would be 0.0004.
- This number would then also be referred to as 4 pips.
- Pips do not denote the number located four places behind the decimal, they simply denote the last decimal place.
- For instance, spreads of 0.06 and 0.0006 are both 6 pips.
What are forex systems and software?
After you’ve settled on a specific broker, there are still some preliminary things to take into account, namely signal systems and trading software. Forex signal systems are simply many systems put together to come up with a buy or sell decision for you. These are generally analysis based software and news driven reports. While some are free or created by the trader, brokers often have their own versions for sale. They are broken into two main types. Figure out which currencies you want to focus and determine if they are either range-bound or trend signals to find the one best suited for your plans.
When you sign on with a forex broker, you generally get access to many perks that banks do not offer. One such perk is known as a platform. This software is your direct means to placing trades or closing options. Because of this, you’ll want to make sure it is visually pleasing and not too complicated. The best platforms have visually clear buy and sell buttons in addition to possibly having a panic button to hit when you want to close all options at once.
The reason clarity is so important is because you don’t want to chance a mistake. Going short when you meant to go long or closing a position instead of adding it are all costly mistakes. Aside from basic functionality, some software comes with other customizable features like strategy builders, trading alerts, trading options and order entry types. Many nowadays even have apps designed exclusively for phones and tablets to keep you connected on the go.
Most forex brokers offer potential clients the chance to try out a demo version of the platform they use. Check out https://www.earlybull.com/forex-demo-account/ to find one. This is extremely helpful and important as it gives you the chance to test out all of the features. You get to see firsthand if the design is user-friendly enough for your liking. In addition, you get to practice with it to make sure you can work out any errors or misunderstandings you have without risking any actual money during the learning process.
It also gives you the time to memorize quick tricks, like closing all positions with a simple right-click which can save both money and time in the long run. Be certain the demo version you are given access to is unlimited and unaltered, however. Should you sign on with a broker and find their software to be different from the demo, pull out as soon as you can. Chances are they rigged the demo to be better than the program actually is to lure you in as a customer under false pretenses. You can read more about rigged demos at https://forums.babypips.com/t/are-demo-accounts-rigged/.