How to Become a Forex Currency Trader
A currency trader, also known as a foreign exchange trader or forex trader, is a person who trades, buys and/or sells currencies on the foreign exchange. Currency traders include professionals employed to trade for a financial firm or group of clients, but they also include amateur traders who trade for their own financial gain either as a hobby or to make a living.
The Foreign Exchange Currency Market
The foreign exchange currency market, often called the Forex, is the world's largest financial market. Daily trading volume on the Forex is typically more than 1,000 times greater than the combined totals of all stock and equity trading markets worldwide. Every currency in the world is traded through this huge, highly decentralized marketplace, with 15 regional marketplaces and thousands of specialist traders.
Becoming an amateur Forex trader is as easy as opening an account with a Forex broker. A few of the largest U.S. Forex brokers are:
- Interactive Brokers
Most large U.S. stockbrokers offer Forex trading as well. If you currently have a brokerage account, it's likely you can begin Forex trading through your stockbroker, in most cases simply by filling out a short online currency-trading application. If you're opening a new Forex account, you'll begin by making a small deposit; some brokers will open an account with as little as a $100 deposit while others may require more.
Making Currency Trades
Once you've opened your account, you begin trading by selecting the currencies you want to trade. Currencies on the Forex always come in pairs. As the value of one of the currency pairs rises, the other falls. Most beginning traders should trade only the most-widely traded currencies, such as the U.S. dollar (USD), the British pound (GBP), or the Euro (EUR) because they are the most liquid and have the smallest spreads. The spread is the charge that the trading specialist, effectively a middleman, charges both buyer and seller for managing the trade.
A Typical Currency Trade
You may believe that the value of the pound is going to rise to against the U.S. dollar. You see that the GBP/USD pair is trading at a bid price of 1.1510 and at an ask price of 1.1511. This tells you a couple of things. First, that the British pound is currently worth about 1.151 US dollars, and that the spread is relatively small -- the difference between the bid (1.1510) and the ask (1.1511).
Note that you always buy at the higher price --- 1.1511 in this instance -- and sell at the lower price. Say you buy 10,000 GBP at 1.1511. If the pound rises to a selling price of 1.1622, you may then sell your position. Your profit equals 10,000 times (1.1662 minus 1.1511), which is $151.00. You've made your first profitable currency trade.
It Pays to Begin Trading Slowly
As you can see from the trade described above, currency trades are highly leveraged, sometimes by as much as 1,000 to 1. Beginning traders may be attracted to the possibility of making large trades from a relatively small account, but this also means that even a small account can lose a lot of money. Your losses aren't limited to your deposit. A 2014 study of forex retail traders concluded that although 84 percent of Forex traders expect to make money in their accounts, only about 30 percent actually do.
A good way to begin is to open a practice Forex trading account. Practice accounts typically open with $50,000 of virtual money. This way you can learn how to trade without spending real money. If after a few dozen practice trades you see that you're trading profitably, you may then decide to trade in your real Forex account.