What Is a Forex Currency Trader?

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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.

How the Forex Market Works

The foreign exchange currency market, also known as forex, is the world's largest financial market. More than $5 trillion are traded on the exchange every day—that's 25 times the volume of global equities. The majority of the world's currency is traded through this huge, highly decentralized marketplace. The forex market has several trading centers, but the main ones are located in Tokyo, London, and New York. This allows the market to operate 24 hours per day. 

Currencies on the forex are represented by three-letter abbreviations, such as USD for the U.S. dollar, EUR for the euro, and JPY for the Japanese yen. Transactions are quoted in pairs such as EUR/USD.

The U.S. dollar is involved in just about every major currency pair because it is the reserve currency of the world.

How to Become a Forex Currency Trader 

First, it's important to understand that there are three ways to trade foreign currency exchange rates:

  1. On an exchange regulated by the Commodity Futures Trading Commission
  2. On an exchange regulated by the U.S. Securities and Exchange Commission
  3. In the off-market exchange (also known as over-the-counter trades)

Once you know where you'll want to trade, you'll need to open a brokerage account. A few well-known U.S. forex brokers include:

  • FOREX.com
  • thinkorswim by TD Ameritrade
  • 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, you just need to simply fill 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 allow you to open an account with as little as 50 of your base currency, though they may recommend you deposit more in order to have more flexibility and risk management with 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, the British pound (GBP), or the euro because they tend to be the most liquid and have the smallest spreads. The forex spread is the charge that the trading specialist, effectively a middleman, charges both the buyer and seller for managing the trade.

What a Typical Currency Trade Might Look Like

Let's look at an example of a forex currency trade. Let's say the British pound (GBP) is quoted at 1.1510. This means that you could buy 1,000 British pounds for $1,150 U.S. dollars. If the asking price is 1.1511, we can see that the spread is relatively low—it's the difference between the bid (1.1510) and the ask (1.1511).

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 the difference between the price you bought it at (1.1511) and the selling price (1.1662). So your profit would be 151, or $151 U.S. dollars. You've made your first profitable currency trade. 

Risks of Forex Currency Trading

As you can see from the example trade described above, currency trades are highly leveraged, sometimes by as much as 1,000 to 1. Beginning currency 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.

Another risk to consider is that the quoting conventions are not uniform. Many are quoted against the U.S. dollar, but there's no regulation or standard for quoting conventions in the forex market.

And don't forget about fraud. Whether you're choosing to trade on a regulated exchange or in the off-market exchange, beware of any scheme that says you can get rich quick.

Before Engaging in Foreign Currency Exchange Trading

One way to begin forex trading without any real consequences is to open a practice forex trading account. For example, FOREX.com offers a demo account and thinkorswim offers a virtual trading tool. Practice accounts typically open with a large amount of virtual money. This may help you learn how to trade forex without spending real money. If after a few dozen practice trades you see that you're trading profitably, you may try your hand at a real forex trading account. 

Article Sources

  1. Investor.gov. "Foreign Currency Exchange (Forex) Trading For Individual Investors." Accessed Feb. 5, 2020.

  2. Nasdaq. "Forex Market Overview." Accessed Feb. 5, 2020.

  3. Library of Congress. "The Foreign Exchange Market." Accessed Feb. 5, 2020.

  4. U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy. "Investor Bulletin: Foreign Currency Exchange (Forex) Trading For Individual Investors," Page 1. Accessed Feb. 5, 2020.

  5. U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy. "Investor Bulletin: Foreign Currency Exchange (Forex) Trading For Individual Investors," Page 2. Accessed Feb. 5, 2020.

  6. Forex.com. "Frequently Asked Questions: How Much Money Do I Need to Open an Account?" Accessed Feb. 5, 2020.

  7. U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy. "Investor Bulletin: Foreign Currency Exchange (Forex) Trading For Individual Investors." Accessed Feb. 5, 2020.