If you have ever wondered what a forex trader does, read this quick blog that explains what forex trading is and the job of a forex trader.
What is being a forex trader?
A forex trader is someone who buys and sells currencies in the global currency market. Forex traders can be full-time professional traders who make a living trading forex or part-time investors who trade forex as a hobby. Forex traders nowadays typically work in front of a screen rather than in ‘the pits,’ as shown in the image below.
Forex (FX) trader’s job is to buy a currency at a low price and sell it at a high price in order to profit. Speculators in financial markets act in the same way that a market trader selling fruits and vegetables does by purchasing the produce at a low price and selling it at a higher price.
What is Forex trading?
Forex trading is how you can trade two currencies against another in forex markets. It’s possible to profit in forex if you buy a currency that strengthens versus another currency. Currency trading is much like day trading stocks but with currencies on the forex market instead of shares on the stock market!
To understand forex trading in more detail, read our blog What is Forex? | How to trade FX
Definition and Example of Forex Currency Traders
Forex traders use currency exchange rates to try to profit from trading foreign currencies. As currencies rise or fall in value about each other, traders try to predict these changes and buy or sell accordingly.
For example, if you’re a forex currency trader, you might focus on trading U.S. dollars and British pounds (GBP).
How Forex Currency Trading Works
The foreign exchange currency market, also known as “forex,” is the world’s largest financial market. More than $5 trillion is traded daily on the exchange, 25 times the volume of global equities. This massive, highly decentralized marketplace is where most of the world’s currency is traded. It has several trading centers, the most important of which are in Tokyo, London, and New York, allowing the market to operate 24 hours a day, five days a week.
On the forex, currencies are represented by three-letter abbreviations, such as USD for the US dollar, EUR for the euro, and JPY for the Japanese yen. Transactions are denoted by currency pairs such as EUR/USD.
Consider the following example to understand forex trading better: Assume the British pound (GBP) is worth $1.1510. This means you could get 1,000 British pounds for $1,150. When the asking price is $1.1511, the spread is relatively low—the difference between the bid ($1.1510) and the ask ($1.1511).
Assume you purchase 10,000 GBP at $1.1511. If the pound rises to a selling price of $1.1622, you may decide to liquidate your position. Your profit would equal the difference between the purchase price ($1.1511) and the selling price ($1.1662), or $151.
Trading in foreign currencies is riskier than many other forms of investing and is not something in which just any trader should engage. With the chance of big profits comes the risk of huge losses, so it’s important to understand how this market works before you decide to become a forex trader.
How to Become a Forex Currency Trader
There are three ways to trade foreign currency exchange rates:
- On an exchange regulated by the Commodity Futures Trading Commission (CFTC)
- On an exchange regulated by the U.S. Securities and Exchange Commission (SEC)
- In the off-market exchange (also known as “over-the-counter trades”)
Once you know where to trade, you’ll need to open a brokerage account. A few well-known U.S. forex brokers include:
- Thinkorswim by TD Ameritrade
- Interactive Brokers
Most large U.S. stockbrokers offer forex trading as well. If you currently have a brokerage account, you can likely begin forex trading through your stockbroker. In most cases, you must fill out a short online currency-trading application. If opening a new forex account, you’ll begin by making a small deposit.
After establishing your account, you can start trading by selecting the currencies you want to trade. Currencies on the forex market are always sold in pairs. When the value of one of the currency pairs rises, the value of the other falls. Most new traders should only trade the most commonly traded currencies, such as the US dollar, British pound, or euro because they are the most liquid and have the smallest spreads. The forex spread is the fee charged by the trading specialist, who acts as a middleman between the buyer and seller for managing the trade.
Risks of Forex Currency Trading
Currency trades are highly leveraged, as demonstrated by the example trade described above, typically by up to 50 to 1, but in some countries, they can be leveraged even more. That means you can use small amounts of money to purchase currencies worth far more than you put in.
Beginning currency traders may be drawn to the prospect of making large trades with a small account, but this also means that even a small account can lose a lot of money.
Another risk to consider is that quoting conventions differ. Many are quoted against the US dollar, but there is no regulation or standard in the forex market for quoting conventions.
Therefore, you have to know the specific meaning of the quotes for the currency you’re trading in, or you will risk losing money unwittingly.
Practice Forex Before You Start
Opening a practice forex trading account is one way to start forex trading without risk. FOREX.com, for example, provides a demo account, and Thinkorswim provides a virtual trading tool. Practice accounts are usually funded with a large sum of virtual money. This may assist you in learning how to trade forex without risking real money. You can open a real forex trading account if you see that you’re trading profitably after a few dozen practice trades.
Is a Forex Trading Career Right for Me?
To enjoy a forex trading career and excel in that career path, candidates should see themselves in the following list of skills:
- Strong mathematics ability
- Problem-solving & analytical skills
- Technical & fundamental analysis
- Strategic thinking & planning
- Meticulous record-keeping
- Self-directed learner
To excel in a forex trading career, you will need to be comfortable in a high-stakes environment and prepared to handle appropriate levels of risk in your trading. With large amounts of capital and assets on the line, a calm and steady demeanor can be helpful in the face of ebbs and flows in currency markets.
Day trading or swing trading in small amounts is easier in the forex market than in other markets for traders, particularly those with limited funds. Long-term fundamentals-based trading or a carry trade can be profitable for those with longer time horizons and larger funds. Understanding the macroeconomic fundamentals that drive currency values and prior experience with technical analysis may assist new forex traders in becoming more profitable.