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1. Learn what currency exchange rates are and how they function. Currencies trade in pairs with exchange rates that can change by as little as $0.0001 (1/100 cent for the U.S. dollar). This tiny change, called a pip, is the basis for pricing in Forex. When you see a quote like EUR/USD = 1.3552, it means it costs $1.3552 to buy one euro. If the dollar figure goes down, it means the dollar is stronger against the euro since it then takes fewer dollars to buy a given amount of euros. All currency pairs work in this manner.
2. Understand how a Forex trade works. When you buy a lot (typically $100,000 worth of a currency), you put up only a relatively small amount of money, often less than $1,000. The broker charges you a fee of 3 to 20 pips, which is $30 to $200 for one lot. If the exchange rate goes your way, you can make a large profit off a small change in rates because you trade with such low margin requirements. What makes Forex risky is that if the market goes against you, you can easily lose all the money you risked.
3. Become familiar with the market factors that influence currency exchange rates. Ultimately, an exchange rate is based on market demand. If demand for a currency increases, it tends to cost more to buy that currency. Some of the factors you'll need to watch out for are trade deficits and changes in a nation's monetary policy. Inflation and changing interest rates also affect currency exchange rates. For example, if interest rates in a country jump, investors can make more money putting their money in that country's currency, increasing demand and driving up the exchange rate.
4. Learn how to interpret and use Forex signals. The term refers to 'technical indicators' that track short-term market trends. Most Forex trades are completed in one or two days, so the short-term measures are extremely important. Many traders subscribe to Forex signal services that provide real-time updates on changes.
5. Open a practice account once you've learned to understand Forex basics and terminology. Leading brokers offer these accounts for free, complete with access to trading software and real-time market information. You use virtual money to make trades and gain experience. This s also a good way to try out trading strategies you've read about or experiment with transaction types like Forex options. When you understand Forex and are ready, you can open a real account (these usually require an initial deposit of about $2,000).