FOREX EXPLAINED (IN BRIEF)

FOREX or FOReign EXchange trading is (in a nutshell) betting that one currency (the US $, Japanese Yen, Euro, etc) will rise or fall against another currency. More officially it is described as "the simultaneous buying of one currency and selling of another."
It is rapidly becoming very popular among traders, especially as the stock market becomes more unpredictable .. and uncertainty about the housing market, oil, dollar devaluation, possibility of recession .. causes 'unnatural' market movements.
You may have heard that Forex is complicated .. or risky. But, as with options, if you learn correctly, you can make money a lot faster & more consistently with less risk.
And with a highly liquid, 24-hour worldwide market that can not easily be manipulated, there is far more predictability. Plus you can trade Forex in & out without daytrading restrictions and you can fund an account with as little as $500.00! This would be trading micro lots where each pip is worth approximately 10 cents and regardless of HOW much money you have, I strongly recommend you start trading in a micro account, after trading in a demo account! Do it right from the start and you will protect your capital & enjoy success sooner.

Recommended minimum for mini accounts ($1 per pip) is $2000.00,
for a standard account ($10 per pip): $20k.
All brokers will give you a free demo account with the MetaTrader4 charting software.. and this is how you start. Please do not trade an account with real money until you have traded your demo account successfully for at least 1-2 months. And please, do NOT start with a mini account; start with a micro account and parlay it up .. you can do it - and if you make some mistakes initially (and you will!) you can still keep going :)

There are usually no commissions in Forex, instead brokers give you a "spread" of 2 or more pips which is their cut of each trade. As each pip can be worth $10 when you are trading full lots, a 2 pip spread can be equivalent to $20 per trade on a standard account, although only $2 per trade on a mini account and 20 cents on a micro account. But since it is built into the trade itself, not a separate charge, you really don't notice it. If you are practicing good money management, the average losing trade in Forex will be -20 pips max ($200 in standard account, $20 in mini account, $2 in the micro account). The average gain will be 60+ pips ($600+ in a standard account, $60 in a mini account, $6 in a micro account). Gains of 100, 200 or more pips are not uncommon!

In Forex, you will learn to find your own style of trading where you can consistently make 10-50 pips per day. Maybe more, but you won't need more. Because of the magic of compounding:

HOW YOU MAKE MONEY: Once you get to the point where you are making, say, 30 pips per day in a micro account ($3 per day, big deal, eh?) .. now you begin the compounding: instead of trading just one micro lot, you trade 2, then 3, then 4. Now you are making 40 cents per pip or $12 per day for your 30 pips. Remember you are STILL doing the same thing over and over to make your 30 pips per day. As your account grows, the micro lots turn into mini lots and then to standard lots. I don't want to sound too unrealistic here .. but a $500 micro account, earning 30 pips per day can compound into over $1 million in under 3 years. And all you are doing on day 1000 is what you did on day 1 .. making your 30 pips each day using the trading style you found most comfortable for you. Most successful forex traders spend less than 2 hours a day trading and often do not trade every day. (The 30 pip per day is an average, 150 pips per week or 600 per month .. very do-able!)

LEVERAGE: You may have heard scary stories of the huge leverage you can have when trading Forex. 100 to 1 leverage means that for every $1000 you have in your account, you can trade $100,000.00 worth of currency! That scared me away for a long time .. until I understood it properly.

It is a lot like options ... say I buy 10 Google calls for $15 each, calls are sold in lots of 100 stock shares = 1 call. So I pay $15 x 100 = $1500 and now I control the RIGHT (but not the obligation) to purchase 100 shares of Google at my strike price, say $650.00. Now if I actually wanted to exercise my right to buy 100 shares of Google, it would cost me $650 x 100 = $65,000.00!! And I only have $10k in my account! Obviously I have no intention of buying Google! So what happens? If I am right about Google and it goes up (duh!) my options could be worth $20 each in a short time. So my gain is $5 x 100 = $500. And maybe GOOG will make one of its mighty moves so the options could double ... $15 x 100 = $1500 profit. I have $10 k in my account and made $1500 .. that is 15% of the account value in a couple of weeks. Compounded that would be well over 1000% per year! If I were wrong, the MOST I could lose is my entire $1500 .. but if I am wrong, I would probably cash out much sooner, losing at most $200 or $300.

That is an example of leverage .. using a small amount of money to "control" a much larger amount without ever having the obligation to pay the larger amount. Forex is similar. You open an account with $500, and the MOST you can ever lose is $500 (with a reputable broker). Open an account with $5000 and that is the MOST you can lose. But it would be really hard to lose it all unless you just buy a currency pair, don't put a stop in, and leave town for a few days ... you would come back to either find yourself very wealthy ... or broke! (NOTE: make sure your broker has built in safeguards to 'zero out' your account without letting it go into the negative. The reputable ones should all have this built in, so you will never end up owing them money!)
Learning to use leverage to your advantage is one of the keys to forex success.
NOTE: new rule as of November 30, 2009 requires brokers to offer maximum 100:1 leverage. That is more than enough!

PATIENCE: Many millionaire Forex traders today will tell you they initially 'blew through' 3 or 4 accounts before learning how to do it right. But with the demo accounts now availalbe and the option to trade micro accounts .. where each pip is only worth a dime, it is really very hard to completely annihilate an account. And if so, it is easily topped up again .. part of the learning process! That's why I beg you to start with a MICRO account! Preservation of your money is always the top priority.

SIMPLE STEPS TO START TRADING FOREX SAFELY

BASIC FOREX EDUCATION

US Residents: when you start making profits, you will need to pay capital gains tax.
If you want to use an accounting service that specializes in working with traders (recommended) click here to learn from my experience who to trust, who to avoid!

THERE IS RISK IN TRADING FOREX!
You can lose ALL the money you put into an account.
Do not ever trade with money you cannot afford to lose!