Forex Beginner: How to Open a Forex Account

Unlike the stock market, Forex trading does not happen at a physical location nor does it have a central exchange.

Hence, a Forex trader can trade wherever they are, 24 hours a day for 5.5 days a week! No wonder that Forex trading is so attractive to many new investors. To start Forex trading, you would first need to open an online trading account where all your currency transactions will take place.

Opening a Forex account involves four simple steps:

1. Choose an Appropriate Forex Trading Site

There are two things to consider when choosing the right Forex trading site for you. First is the leverage the site offers. Each site offers different leverage, which can range from 50:1 to as high as 250:1.

A leverage factor of 50:1 for instance, would allow a person with USD 1,000 in his account to trade USD 50,000 in the Forex market. While this could allow you to make large gains with small investments, it can also amplify your losses if a trade moves against you.

It is important to understand the risks involved in determining your intended leverage. Also, the trading site should be commission-free, as you do not need to go through a third party, like brokers for stocks.

Examine the site properly before you decide to make sure they offer features that you need.

1. Choose an Suitable Account Type

Forex trading accounts come in different sizes, ranging from USD 25 (micro / mini accounts) to USD 10,000 (standard accounts). Choose the account size according to the amount you want to invest in.

Choose a Forex trading spot account, which allows instantaneous trades and is more popular, instead of a futures account.

1. Register For a Forex Trading Account

Most of the registration is done online and would require your personal details as well as your credit card details for real cash trades. Make sure you enter your email address properly.

1. Activate Your Forex Trading Account

You would be asked to verify your details through several steps. Make sure you read through and understand the terms and conditions before you sign them online. Pay particular attention to the operating hours of the site, the availability of live technical support and any hidden commission/charges.

Some sites also offer a limited-time demo account with no real cash involved. You can use it to familiarize yourself with Forex trading before you trade with real cash. Congratulations! You are now ready to hit the Forex market!

Understanding Forex Jargons

One of the major frustrations of Forex traders is the awful lot of jargon. Googling those terms does not seem to help either because the explanations are more often than not, contain other jargons.

This chapter will explain five common technical terms used in Forex trading in layman language.

Quote: Forex trading is always done in pairs and thus a currency is always quoted relative to another currency, e.g. USD/JPY, EUR/USD, AUD/GBP. A quote would look like this: USD/JPY = 100.00.

The currency on the left (in this case, US dollar) is known as the “base currency” and always equal to 1 unit, whereas the currency on the right (in this case, Japanese Yen) is called the quote or counter currency.

A quote is how much one unit of the base currency, hence this particular quote means that USD 1 can purchase 100.00 Japanese’s Yen.

Pip: stands for “percentage in point” which is the smallest increment of trade in Forex. Prices in the Forex market are always quoted to the fourth decimal place, except Japanese Yen; e.g. when EUR/USD rises from 1.5200 to 1.5201, it rises by 1 pip.

For Japanese Yen, 1 pip is equivalent to 0.01 (two decimal places). Most currency pairs trade between 100 – 150 pips daily.

Bid/Ask: In Forex, to bid means “to buy” whereas “to ask” means “to sell”. The quote on the left is the bid (buy) price while the quote on the right is the ask (sell) price, and the bidding price is always lower than the asking price. The base currency would be the one in which the transaction would be conducted.

Let’s look at the example, EUR/USD 1.2600/02. To sell this currency pair means to sell the base currency, i.e. the EURO. The market would buy your 1 EURO base currency with 1.2600 USD. On the contrary, to buy 1 EURO, you need 1.2602 Japanese Yen.

Spread: is the difference between the ask price and the bid price. Using the same example as above, the spread was 2 pips, which you automatically pay to your broker at every trade.

Margin: The minimum amount of money required to place a trade with a broker. You can trade as long as your account has this minimum amount, otherwise your accounts would be closed down.

Understanding the terminologies would definitely boost your confidence in trading and discuss your trade with other traders without sounding like a total novice!