Forex - the 6 Most Frequently Asked Questions

By: Justin Stewart

When you're unfamiliar with forex (the foreign exchange market), and you are thinking about engaging in currency trading, there will always be questions that you are going to have, especially if someone is trying to convince you that you should be involved in it. You should ask all the questions you can think of. The main problem is that it isn't always easy to get honest and straight answers. Here are the most frequently asked questions about foreign exchange, and hopefully, the content will answer some of yours.

What is the best way to get started trading in the foreign exchange market? Opening an account with a Forex broker is the first step, and then funding the account is the second. Taking a course, or doing as much reading about Forex is a recommended course of action when you are just beginning.

How much previous trading experience should I have?
You're not required to have any trading experience in order to participate in trading in the Forex market. However, if you have prior experience in trading commodities, options, or stocks you do have an advantage over someone who has never engaged in these investment activities. An excellent and recommended way to learn and train for this kind of financial concept is to "paper trade." This is a way to learn without the use of real money.

Are commissions high when you trade in the Forex market?
This just depends as most brokers offer fairly low commission rates. However, every broker is different and commission rates will vary, but overall, Forex brokers charge a lower commission than what stock brokers and investment houses do.

How can I limit my risks when it comes to Forex trading?
The first step is to educate yourself as to what Forex is, what is involved, and the basic operations of the Forex market. A solid education in this is tantamount to success and there are several good programs out there that will help you comprehend and understand how Forex works. Paper trading where you engage in Forex trades without using money is a great way to learn and practice trading skills. Sixty to ninety days of training is recommended. Another way to limit your risks are to get familiar with the concepts of certain risk managing tools like limit orders and stop loss orders.

What are the risks involved in trading Forex?
The risks are the same as playing the stock market --- significant financial loss. It's an old rule of thumb, but you should only invest what you can afford to lose. Not only is the financial loss factor a great risk, but high levels of leverage can equate to a trader losing everything. The bottom line is to research the targeted currency or asset and plan your trading carefully so that losses are minimal.

What is the profit potential when trading Forex?
Considering the high amounts of leverage involved in Forex, profits could be unlimited. A standard account affords the trader a leverage factor of 100:1. This basically means that you can control 100,000 units of currency with a $1,000 investment. But don't forget that you could also lose it all as well. With this amount of leverage, a positive move in the right direction can mean huge profits for the trader.

Foreign Exchange
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