Traders who are entering the forex (FX) market for the first time are wise to learn about currency trading and its intricacies. A variety of free learning tools and resources are accessible such as virtual demo accounts, mentoring services, online courses, print and online resources, signal services and charts. This article explains the preliminary steps to finding a footing in the FX market.

For more details, see: "Forex Walkthrough"

Find a Broker

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

  • 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, choose a large market maker that is regulated in at least one or two major countries. Moreover, the larger the market maker, the more resources it has to ensure that its trading platforms and servers are stable and are not likely to crash when the market becomes active. Third, find a market maker with enough employees that you can place a trade over the phone without hearing a busy signal. Bottom line, find a legitimate market maker to trade with and avoid a bucket shop. (For related reading, see Understanding Dishonest Broker Tactics.)Where is the FX market maker incorporated? Is it in a country such as the United States or the United Kingdom, 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?

Check the Broker's History

In the United States, 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 United States.

Another advantage of using a registered FCM is greater transparency in business practices. The National Futures Association keeps records of all formal proceedings against FCMs, and traders can research the firm to identify any serious problems with clients or regulators by checking the NFA's Background Affiliation Status Information Center (BASIC) online.

Test a Demo Account

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 unique to this market and you should exploit it to your advantage. Learn how to use the trading platform and compare platforms to each other in order to find the one that best suits your goals. Most demo accounts have exactly the same functionalities 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 to fully understand how to use the trading platform, to practice 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 explore the FX market.

Do Your Research

When you trade, never trade impulsively. You should be able to justify your trades, and the way to find a justification is by doing research. There are many resources such as books and newspapers with information in FX market trading. 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 technology-driven market, technical analysis is an important area of research for the uninitiated. The stronger you are at technical analysis, the better you can trade the FX market from a speculative perspective. (For further reading, see Introduction to Technical Analysis.)

With regard to newspapers, seasoned forex traders typically refer to the Financial Times and the Wall Street Journal because they contain international news. Trading FX involves looking beyond just economics since politics and geopolitical risks can also affect a currency's trading behavior. Therefore, 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, keep up to date on daily fundamental and technical developments in the FX market by visiting FX-specific research websites.

Education and Mentoring Programs - Are They Worth It?

The benefit of online or live courses compared to books, newspapers and magazines is that you can see frequently asked questions that other people have posted and the responses. In a classroom setting, either online or live, you can learn from the experiences and frustrations of others. A mentor or teacher can draw on personal experience and help you to avoid the mistakes they have made, thus saving you 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 systems. Fundamental systems are rare in the FX market; they are mostly used by large hedge funds or banks because they are long-term in nature and do not provide 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.

Even the largest hedge funds in the world are still seeking the switch that can identify whether they are in a trend or a range-bound market. Most large hedge funds tend to follow trends, 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, whereas trend systems will make money in trending markets and lose money in range-bound markets. Therefore, before you buy into a system or a signal provider, find out whether the signals are mostly range-bound signals or trend signals. This way you will know when to take the signals and when to avoid them. (To learn more, see Identifying Trending & Range-Bound Currencies.)

Trading Setups - Find 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 help you avoid 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.

Conclusion

Learning to trade in the FX market can seem like a daunting task initially. However, there are many accessible practical and educational resources available to the individual trader. Learn as much as possible before you risk actual money. Print and online publications, trading magazines, personal mentors and online demo accounts are invaluable guides for your journey into currency trading.