How to become a forex trader
A foreign exchange trader or forex trader essentially refers to a trader of currencies i.e. buying and selling currencies to eventually profit from a more favorable exchange rate. However, forex brokers and the forex market have made this process much more straightforward and easily accessible to the public.
In fact, in order to start trading forex, you only need 3 things. An internet connection, a forex trading account and a moderate amount of money to invest. For example, some newbie-friendly brokers will have accounts with a minimum deposit limit of $250 limit, which is quite affordable.
How do you trade currencies?
Trading currencies on the forex market is quite simple. The only point of confusion stems from the fact that with any single trade you are simultaneously trading two currencies or a currency pair instead of buying one currency and selling it for another in two separate instances.
To explain further, when you trade an asset on the trading platform and there are hundreds to choose from mind you, you will see EURUSD = 1.10126 / 1.10140. In this case you have the option to buy or sell this pair at the indicated exchange rate. So, by opening a buy position in this pair, you will effectively be buying euros and exchange them for U.S dollars at the ask price which is the one on the right (1.10140). 1.1026 is instead the price you would be paying for selling the pair or selling euros for U.S dollars.
It may seem complicated, but the objective is quite simple. Open a buy or sell position in a forex pair and wait for the exchange rate or price to reach a more favorable point in order to close your position and realize a profit according to how much the exchange rate moved. Since trading forex is a speculative market, you aren’t actually buying and holding any physical currencies. You are just speculating on price movements, but if your speculation proves to be correct, you will be able to see your profit directly in your trading account as soon as you close your position.
Forex trading is such an attractive investment opportunity because of the liquidity in the market. The number of market participants is so vast that it guarantees that you are always getting the most competitive price and that your trades are executed in a matter of milliseconds. This is quite important since the exchange rates are quite volatile and can rapidly move up and down just as easily.
Liquidity and the USD are kings
Considering the importance of liquidity in forex trading – it makes sense that its most beneficial for traders to trade the most popular currency pairs since they enjoy the most trading volume and hence offer the best prices and fastest transactions.
With the U.S dollar being the most valuable currency, the world’s reserve currency and the one used in global trade, it’s only logical that it holds first place in all forex transactions. In fact, what we call major forex pairs, the ones that are most popular, all have the USD as one part of the transaction. EUR/USD, GBP/USD, USD/CHF to name a few.
Therefore, if you want the best bang for your buck and less surprises due to limited trading volume, it’s best that you focus only on these major forex pairs and watch out for news regarding the USD.
You should also note, however, that while USD based currency pairs are the most liquid, liquidity also depends on timing. The forex market is open around the clock during weekdays, but traders aren’t awake or active throughout the day. Different regions have different trading hours and there are 4 major trading sessions:
- New York
Knowing when each trading session is active, when they converge and what currency pairs are the favorites for each one can be greatly beneficial for your trading strategy.
What to avoid while trading
Though trading forex, has never been easier or more accessible to the masses, there’s still a lot of risk involved. There are a lot of new concepts that you need to come to terms with and a lot of self-restrain needs to be applied in order to avoid falling victim to greed and over-trading.
Before you even start trading, you need to determine how much you are willing to invest in your trading account. This trading capital should be a moderate amount that you are willing to lose because most of the time this is the case with beginner traders. It takes a while before you start learning the importance of money and risk management and most traders struggle controlling their losses and managing how they can limit their impact on their overall investment.
One way to limit your risk exposure in the market is to reduce the amount you risk with every trade – making sure not to open positions that exceed 3% of your total investment. Risking less capital on each trade guarantees that even in the case of consecutive losses, you will still have enough trading capital to recuperate.