You may find some websites that claim to offer risk-free trading but that is nonsense. When you are trading substantial sums of money, there is always the possibility that you could lose money as well as make it. Making sure that you are well briefed, that you understand the market, and are using reliable Forex signals will minimise the risks and potential losses.

One of the biggest risks to individual Forex traders is choosing a disreputable broker so ensure that your broker is backed by a reputable financial institution, registered with the Financial Services Authority or other regulatory body, and is providing you with the tools and news feeds on their Forex trading platform to enable you to make educated decisions about trading.

Even with a decent broker on board, there are risks inherent in any Forex trade.

Exchange rate risk

This is the risk of fluctuations in currency prices over the course of a trading period. If you have a decent Forex signal system in place you can mitigate against these risks but some are impossible to predict, such as Japan’s earthquake and tsunami. Stop-loss orders can close a position automatically if the currency passes a pre-determined value.

Interest rate risk

This is where there are differences in the interest rates between the countries in a currency pair which can lead to reduced profits.

Country risk

This is where governments limit the flow of currency to the markets. The risk of this happening is much reduced if you stick to trading to major currencies which are less likely to resort to this type of tactic.

Some websites make wild claims about how much money you can make from Forex trading if you only download their guide or follow their advice. Like any form of trading however, successful Forex trading is dependent on understanding the rules and becoming as educated as you can possibly be before starting trading.

Many brokers offer a demo Forex trading platform where potential traders can play the market with dummy money before committing any funds. A good rule of thumb is to operate one of these for two consecutive months and remain in profit throughout before committing any funds. Trading on a demo also allows you to get a good understanding of your appetite for risk. Knowing your appetite for risk is very useful before you starting trading with real money.

Leverage is also an important factor in making money. Most brokers operate a leverage of 100-1, meaning that for £1000 of investment, you can control £100,000 worth of currency. Others offer higher leverage, up to 500-1. So with that sort of leverage, it is possible to make thousands within the hour if you choose your currency pairs wisely. However, to make serious money, you need to put in serious deposits and it is wise to start small and build up your deposits before putting bigger amounts on the table.

As with any form of trading, it is wise not to invest amounts that you cannot afford to lose so build up your reserves slowly and you could find yourself having a very profitable sideline.

Forex trading is very simple in essence. Traders convert their money into a different (or counter) currency and hope that currency increases in value. Then they covert back into the original (or base) currency and they have made a profit simply by moving one currency from another.

For example, say you had £90 (in Forex terms, that would be considered GBP100) and exchanged it for $100 US Dollars and watched the markets to see how the exchange rates moved. After two weeks, if the exchange rate went from 0.9 up to 1.0, the dollars you own now are worth more than the pounds you originally owned. If you then exchanged the dollars back for sterling, your investment is now worth £100.

Effectively, as someone operating on a Forex trading platform, you are buying and selling currency (or money, to put it in very simple terms). When you buy, you hope that the currency will grow in value, and conversely, when you sell, you are hoping it will decrease in value.

There is no physical exchange of money and there is no central exchange. Instead of stocks and shares which are traded on an individual market, currency or Forex is traded on what is known as an ‘interbank’ market, where there are a huge number of institutions which affect the value of the currency and where every single transaction also has an impact.

A Forex trader is effectively trading on the success or failure of an individual country’s economy.

In the 1930s there was a worldwide depression with a number of monetary crises leading up to the start of the Second World War.

At the end of the war, leading countries got together under the initiative of the US and signed the Bretton Woods agreement. This agreement sought to prevent the appalling destabilisation of currencies before the war by agreeing to a system based on the US Dollar. This system was effectively a fixed exchange rate for currencies with the US dollar fixed at $53 per ounce of gold (the ‘gold standard’) and was intended to be permanent. At the same time, international financial institutions were established such as the IMF and the World Bank.

This system operated throughout the 1950s but came under increasing pressure throughout the 1960s as economies shifted and recovered from the ravages of the war. It eventually collapsed in the early 1970s when the US economy was under serious strain from trade deficits.

In the late 1970s, the EEC introduced the European Monetary System and followed that with the Maastricht Treaty in 1991 which was the precursor to the introduction of the Euro in 2002.

Over the last few decades, restriction on currency flows have been removed by most jurisdictions and Forex trading has grown into the world’s largest global market. With the growth of the internet, restrictions have been lifted further, allowing individuals to trade via a Forex trading platform and a nominated broker.

There is a good deal of confusion about these terms but, in Forex trading, they are effectively two sides of the same coin as you are always trading in currency pairs.

Taking a long position is the most traditional form of trading and is where you buy a currency pair at a lower price and hope to sell it later at a higher one. When a trader takes a long position, they are hoping that the base currency is going to rise in value while their quote currency declines.

If a trader thinks a currency pair is likely to fall in value, they sell them with the goal of buying them back later at a lower price. This is known as taking a short position.

However, because you are always dealing in two currencies in Forex trading, you are effectively taking a long position on one currency and a short position on the other. However, the trader will always define their position in relation to the base currency of the pair. When a trader buys a base currency, they are taking a long position (hoping that the value of the currency will rise against the counter or quote currency), when they sell, they are taking a short position.

New traders can practice their skills in taking both long and short positions by using a demo of a Forex trading platform for a few months before committing to any cash outlay.

It is entirely possible to start trading in Forex with very little knowledge. Your broker and Forex trading platform will be able to help you acquire knowledge on the way but it is always useful to understand the most commonly used terminology.

There are three terms specific to Forex that are useful to understand – base, quotes and pips. Some people find these terms confusing but they really are simple to understand.

The base currency is your starting currency so the currency you are selling to buy another currency. You can choose any currency to be your base currency in Forex trading, it does not have to be the currency of the country you are based in.

The quote is simply what your starting currency is worth relative to another currency. So if you were trading British Sterling for US Dollars and got a quote of 0.65735, that would mean that every dollar you buy will cost you £0.65735.

Finally, a pip is the lowest amount that any currency can be traded in. Brokers talk about currency movement in terms of pips so, for example, “The Swiss Franc has moved up three pips”. With the exception of the Japanese yen which only runs to two decimal places, other commonly traded currencies run to four decimal places. So a pip is equivalent to 0.0001, except for the Yen where it is 0.01.

It is worth reading around the subject before you start trading so that you become familiar with the terminology and can use it comfortably from the outset.

‘Forex signals’ is a term that you will hear a lot when you begin trading. Forex signals are basically indicators that traders use to help them decide whether to buy or sell a currency. Some traders use a formal Forex Signal System to do this, others rely on the alerts that are sent to them via their Forex trading platform through RSS feeds, emails or tweets.

Unlike other markets, the Forex market operates 24 hours a day, 7 days a week. It does not stop for public holidays or other events in the calendar and is not tied to any particular Stock Exchange.

Having an understanding of what is likely to affect currency movements is therefore critical to becoming an effective and successful Forex trader. Some traders set up an automated robot to buy or sell when particular events take place but to do this successfully, you need to understand what is likely to affect the currency value and make sure that you are not receiving ‘false signals’. False signals are usually down to inaccurate data or delays in the receipt of information so it is sensible to have a sense check in place before any automated system kicks in, otherwise you could find yourself losing a great deal of money through selling currency pairs based on inaccurate information.

Most successful traders use a variety of systems and strategies to cope with these variables, rather than relying solely on an automated system or an inflexible signal strategy.

Every Forex trading platform provides a charting facility but, as with any tool, if you are unable to read the charts properly they are of little use. It is really worth spending two months using a demo and making sure that you are making a consistent profit before opening an account with real funds. Over a two month period, a consistent profit cannot be down to luck alone but can only ever be as a result of understanding Forex signals and being able to analyse chart data accurately.

New traders need to decide what time frame they want to trade over. Are you going to make quick short trades (known as scalping), day trades or longer term ones (known as position trading)? Once you have made that decision, you can set your charts up so that they reflect the period of time you are likely to be trading over. Charts are usually available in 1, 5, 15 minutes and hour, daily and weekly time intervals.

Once you have decided on your highest and lowest time frames (so if you are a daily trader, your highest would be daily, lowest would be 15 minutes), you need to carry out top down analysis, reading the charts from the highest to the lowest time frame. This will allow you to have an overview of trends for your chosen currency pair so that you will know the general trends. Studying these over a period of time means you will be able to pick up any sudden blips in the lower time frame to allow you to open trading at the right time.