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What is a forex trader?
A forex currency trader, or simply, Forex trader is also known as a retail Forex trader, is a person who trades currencies on the Forex market for financial gain. Experienced Forex traders may work for a company or have clients for whom they trade Forex.
The Forex market trades over $6.6 trillion a day, so there are plenty of opportunities to trade Forex. The industry, however, has a 85% failure rate for retail Forex traders. It's not easy to be successful at trading currencies. It takes a lot of practice and mistakes, which include losing real money.
Before you start trading Forex, there is a lot to learn.
What Does a Forex Trader Do to Make Money?
The Foreign Exchange has hundreds of currency pairs where money is being exchanged and traded 24 hours, five days a week. Prices go up and down, with price fluctuations happening every day. The Forex trader attempts to profit from taking advantage of the price fluctuations by buying or selling a currency pair and exiting the trade for a profit.
It may sound easy enough, but it isn't. To a novice trader, the Forex market can seem complex and chaotic. The profit opportunities are vast, but, equally, most traders end up losing money. It is a high-risk business. New Forex traders start trading Forex before learning the pros and cons of trading Forex. Primarily, this is the reason for the 95 failure rate.
The professional Forex trader may have started in the same way, losing money and thinking that trading Forex was easy. They come into trading Forex with a gambling mindset.
At a point, a Forex trader can go one of two ways –
- The Forex trader loses all of his money. Burnt out and exhausted, he/she decides it's too much like hard work and gives up
- The Forex trader may have lost all or most of his/her money. But, he/she believes it is possible to master trading Forex. He/she stops trading for a while and commits to his education, practising in a Forex demo account and perhaps buying a Forex training course. He spends time watching the charts and studying how professional traders succeed.
Only 5% of Forex traders follow the second path. But, in reality, it is the only path to possible success.
How Does the Forex Market Work?
Forex is the world's largest financial market, with several trading centres – Sydney, London, New York and Tokyo. So, at any time, no matter where you are in the world, you can trade Forex 24- hours, five days a week and, because liquidity is so good with Forex, you can find currencies to trade.
Currency pairs display three-letter abbreviations, such as GBP/JPY for Great British Pound/ Japanese Yen, EUR/USD for Euro/United States dollar.
The first currency is the base currency, and the second currency is the quote currency.
There are major currency pairs, minor currency pairs and exotic currency pairs. The major pairs are generally more stable to trade, but the minor currencies are popular. For the exotic currency pairs, liquidity tends to be lower, so they are less popular for trading. The U.S dollar features in many pairs, primarily because the dollar is the reserve currency of the world
There are seven major currency pairs. These are the currencies traded most in the world.
- AUD/USD (Australian Dollar/U.S Dollar)
- EUR/USD (Euro/U.S.Dollar)
- GBPUSD (Pound/U.S.Dollar)
- NZDUSD (New Zealand/Dollar U.S. Dollar)
- USDCAD (U.S. Dollar/Candian Dollar)
- USD/CHF (U.S.Dollar/Swiss Franc)
- USD/JPY (U.S.Dollar/Japanese Yen
The Australian dollar is called the Aussie. The Canadian dollar is called the Loonie, and the Swiss franc is called the Swissy.
To see how Forex works, let's take EUR/USD as an example. The Euro is the base currency, and the U.S dollar is the quote currency.
The price is at, say, 1.2050, and you want to buy (often called a Bid) because you think the Euro price will rise. You place an order for a buy on EUR/USD and set your target price to take a profit. Say your target is 1.2100, you exit the trade with the difference between 1.2050 and 1.2100.
If you decide to sell EUR/USD, you believe the U.S dollar is stronger than the Euro. You place the order to sell EUR/USD (often called an Ask) and set your target price.
Note: Although you are selling the pair, you are buying the U.S dollar
If your target price is 1.1950 and the selling price is 1.2045, your profit is the difference between the two values.
The Forex trader makes the profits from the price fluctuations.
How Do I Become a Forex Currency Trader?
It's surprisingly easy to start trading Forex. You can start trading with a few hundred dollars. However, low capital restricts profit potential but can be a good start for practising live trading Forex.
The first step is to open an account with a regulated Forex Broker. There are hundreds, if not thousands, of Forex brokers available online. However, some unscrupulous brokers are not regulated and can make up their own rules.
Forex brokers with a licence have spent a lot of money registering with the Governing Financial Body of their country. They have to jump through a lot of hoops and follow every rule assigned by the licence provider. Therefore, they commit to taking care of their traders because they don't want to lose their licence.
Once you have opened your Forex broker account, you have two choices –
- Deposit funds and download the trading platform software and start trading – if you are brand new to trading Forex, there is a lot to learn. When you first look at a chart, it will look like many flashing lights and price movement, but you will not understand what to look for or what to do to make money. Any trade you take is likely to be guesswork. If you want to lose your money fast, this is the way to do it
- Download the broker's trading platform but start with a demo Forex account – it may take you 3-6 months to become familiar with the trading process. There is a lot to learn. For instance, if you don't understand lot sizes, you could place a massive order in the market and suddenly find you have lost half your account. Time spent practising Forex in a demo account will build your confidence. You will learn about price patterns, indicators and tools you can use and the best time to place an order.
Whether you are trading live Forex or practising Forex with a demo account, choose USD pairs or GBP and Euro. These are the most popular pairs, so liquidity is high, and they have the smallest spreads. Ideally, trade currency pairs with small spreads of 1-3 pips.
Tips: Some brokers, such as FOREX.com, will allow you to open an account with as little as $100.
What are the Risks of Forex Currency Trading?
One danger of trading Forex is if you over depend on leverage. When you open an account with a Forex broker, they will offer you leverage options. For example, at this time (April 2021), the United States brokers are capped at 50:1 leverage, and the United Kingdom broker leverage is 30:1 maximum.
What this means is for every dollar, you have the buying power of $50 (at 50:1). On a $1000 account, that equates to $50,000, which is a lot of money for a novice trader to control. In the beginning, it's unlikely you can handle such amounts. Most of your trades may end in a loss for the first few months. It's a bit like taking your first driving lesson in a Ferrari.
Initially, trade with the money you have. Margin can quickly get away from you, and suddenly, you get a margin call from your broker, which means your account is in danger of imploding. If you use leverage, you can lose a lot of money fast.
Recap of What is a Forex Currency Trader
A Forex currency trader buys and sells currencies on the Foreign Exchange markets. They aim to make a profit from currency price fluctuations between a currency pair.
It's easy to get started trading Forex by opening an account with a Forex broker and depositing funds. You can opt-in for a demo Forex account to practice trading Forex or start live trading Forex with a few hundred dollars. We recommend using a regulated broker and avoid unscrupulous unregulated brokers.
You can trade Forex 24-hours a day, five days a week, in a highly liquid trading market.
Trading Forex is high risk with a 95% failure rate. Be determined to become a successful Forex trader and be one of the elite 5% of professional traders. Take steps to educate yourself on Forex and learn from successful Forex traders.
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading or investing in financial instruments such as Forex may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.
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