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Forex trading can be a great way to get rich, but all the upside comes with a significant amount of risk. If you want to become a Forex trader, you'll have to learn about the markets and manage the ups and downs.
Our experts at Traders Union have put together a beginner's guide to teach you how to become a Forex trader. From here you can learn what Forex trading is, how you can open an account, and some of the general rules you’ll need to follow to be a successful Forex trader.
Forex trading (also called F.X. or foreign exchange trading) is the process of exchanging one currency into another currency. These exchanges happen for several reasons, such as tourism, commerce, or trading.
Forex trading is where currencies are traded on a currency exchange market. Currency change is essential because it allows people and businesses to buy goods and services locally and across borders. To facilitate this process, international currencies need to be exchanged to carry out foreign exchange and trade.
For example, if you live in the United States and want to buy something from the United Kingdom, you'll need to pay for it with Great British Pounds (GBP). Therefore, the importer has to put an equivalent amount of U.S. dollars (USD) into GBP.
One interesting aspect of Forex is that there's no central marketplace for foreign exchange. Instead, currency trading happens electronically over the counter (OTC). That means all the transactions are conducted via computer networks between global traders.
The markets are open 24 hours a day, for five and a half days per week, across big financial centers of London, New York, Paris, Tokyo, etc. When the market closes in the U.S., it opens in Tokyo and Hong Kong. As a result, the Forex market can be highly active at any time in the day, with price quotes jumping around significantly.
Forex trading comes with several pros and cons.
Forex Trading Pros
1) Accessibility
The Forex market is one of the more accessible markets for retail traders. Traders can set up a Forex account within 1-3 days and begin trading with small sums of money like $100. Most Forex brokers facilitate online trading and even include tools that give them access to up-to-date market prices, price charts, and even educational materials.
Additionally, as we mentioned, Forex trading is open 24hrs a day, five days a week. These hours give traders more possibilities to trade than traditional markets.
2) Potential for Fast Returns
A big plus of Forex markets is their potential for fast returns. Traditional markets can take a while to bear fruit which means returns aren't realized until months or years later. However, Forex is fast-moving, with deep liquidity.
3) Liquidity
Forex markets are the biggest global markets by volume. This reality means there is a lot of opportunity for trading, especially with major currency pairs. Liquidity is one of the most significant factors that attract people to the foreign exchange market.
4) Good Opportunities for Technical Analysis
The Forex market is an excellent place to use technical analysis. Other types of trading like shares or bonds require analysis of fundamentals and awareness of the health of bond and share issuers. However, Forex traders can yield profits by using technical analysis of price charts.
Fundamental analysis usually needs detailed background info about assets, while technical analysis (T.A.) is based on trends or price histories. These details can offer investors clues about the market's perception of supply and demand and the overall sentiment about those assets.
5) Lower Potential for Inside Trading
Stocks, bonds, and commodities markets can be subject to influence from private information from insiders and or stakeholders. These people have access to information that retail traders don't have, which can help them make better decisions.
The currency market is much less centralized, so it's less vulnerable to influence from insider information. Typically, the only people who have inside information about potential currency price movements are central bank authorities or government officials. These individuals are generally held to tight, intense levels of scrutiny or government oversight.
As a result, Forex markets are some of the most transparent markets for investors.
6) Automation
Forex trading lends itself well to automated trading strategies. With a bit of technical study, Forex traders can automate their trades. Additionally, many Forex platforms will take instruction from traders on specific market conditions and price movements.
A Forex trader with a robust automated strategy can capitalize on the day-to-day swings in the Forex market without being too active themselves. This arrangement can spare them from the physical and mental strain of daily trading and research.
Forex Trading Cons
1) Volatility
Most markets are subject to a level of volatility from time to time, and the Forex market is just the same. If you enter the Forex market looking to get some short-term profits, you can be exposed to extreme volatility. Of course, this cuts both ways and can produce good yields. However, traders should remember that high volatility can render their trading strategies unable to produce desired results.
2) Retail Traders Can be at a Disadvantage
As we mentioned above, Forex markets are some of the most liquid markets available to investors. Trillions of dollars are traded each day, with the most significant proportion of this done by big players like banks, financial institutions, and hedge funds.
These major players have high trading volumes and more access to technology and information. These factors can give them an advantage at setting prices and influencing the market price movements.
Of course, it's not only Forex markets that are subject to these advantages. However, it can be more pronounced in Forex. Traders need to keep on top of the changes in market conditions to make sure their trades are profitable.
3) Fewer Regulations
Because Forex markets are over-the-counter, it means that the trades aren't processed on a centralized exchange. Therefore, regulatory oversight is lower than in other markets.
All traders should do their due diligence on brokers they trade with.
4) Fewer Dividends or Residual Returns
Stocks and bonds often make regular interest and dividends payments. These payouts are significant factors when evaluating the long-term value of a particular asset.
Forex trading is mainly focused on achieving capital gains from the appreciation of a currency in the selected currency pair.
Interestingly, overnight Forex positions can pay interest. This interest is often called carry or rollover interest.
If you are wondering how to become a Forex trader, this guide should offer you the guidance and advice you need. Our step-by-step guide will help you find the right broker, open an account, and identify areas where you can make a profit.
Step 1. Choose a Reliable Forex Broker
The first step on the road to becoming a Forex trader is to find the right broker. Some of the criteria involved in selecting a good broker are that they are regulated in your country, that they offer low commissions, and that they offer favorable trading conditions.
Different brokers are better for particular regions. Our experts agree that if you are trading in the U.S. IG is your best option. If you are operating in the UK, FxPro is your best option, and if you're trading internationally, X.M. is your best choice.
IG is an excellent choice for any U.S. citizen wondering how to become a Forex trader. Founded in 1974, they have a solid and trusted worldwide reputation. They have a comprehensive range of offerings and a big focus on the education of investors.
FxPro is a trusted and well-established U.K. broker. Formed in 2006, they offer Forex and spread betting. FxPro allows traders access to lots of markets, like currencies, commodities, indices, and shares. Additionally, they are one of a select number of brokers who offer crypto CFDs.
Licensing: FCA,CySEC, FSCA and SCB
Commissions: EUR/USD 0.5 to 1.5 pips
Deposit minimum: $100
Trading Instruments: CFDs on Forex, Futures, Shares, Spot Indices, Cryptos, and more.
XM is an online broker whose parent company was formed in 2009. Known for their low stock CFD and withdrawal fees, they place a particular emphasis on education, with lots of tools and webinars. Additionally, they offer demo accounts.
Licensing: CySec, ASIC, and IFSC
Commissions: $3.5 per $100,000 traded
Deposit minimum: $5
Trading Instruments: Forex, Gold, Oil, Stocks, Indices
Step 2 Open an Account
Account Opening on IG
Once you've found the right broker for your needs, you'll need to open an account. In this example, we'll take you through the process of opening an account with IG.
You'll need to fill out an application form. IG will ask for your name, email address, user name, and password.
How to Register on IG
Step 3 Test a Trading Strategy on a Demo Account
Most Forex brokers offer investors a demo account so they can get to grips with trading basics. Before making a deposit, traders should use a demo account.
Of course, it's not just traders who can benefit from a trading account. Experienced traders can also use them to try out different strategies without losing money.
Demo accounts work the same way that real trading accounts do. This situation is arguably the best benefit of a paper trading account: they simulate trading conditions. So, once the trader feels ready, they can switch to a standard version. From here, your profits and losses will be real.
Demo Account on IG
Step 4. Make a Deposit and Start Trading
Once you know your way around the platform, it's time to make a deposit. However, how much of a deposit you make depends on several factors. The most important principle to remember is never to deposit more than you can lose. Forex trading can be a great way to make money, but it can also involve severe losses.
When you are evaluating how much to deposit, use a small risk-free amount. According to experts, a good amount is 1000. However, your deposit should be large enough that you aren't tempted to use excessive leverage. Leverage is a valuable tool, but it can result in big losses if the market turns against you. IG offers Forex leverage of up to 50:1.
Step 5. Explore Passive Income Options
Learning to master Forex trading takes a lot of time and energy. So, if you are looking for gains, it's worth exploring the passive income options on offer. Some of the best options are PAMM, copy trading, and using managed funds. It's probably better for beginners to find ways to get passive income at first.
Here is a look at some of these methods.
Forex PAMM
Forex PAMM accounts are a good option for investors that are interested in trading Forex, but who don't have the time or the skills right now. PAMM, also called percentage allocation management module, is like a pooled Forex trading account similar to an actively managed fund.
These arrangements are pretty straightforward. Instead of figuring out how to invest themselves, investors allocate money to money managers or qualified traders of their choosing. These managers and traders manage Forex accounts using pooled money to gain profits.
Copy Trading
Copy Trading is a relatively simple concept: You use technology to copy the real-time Forex trades, or Forex signals, of other investors that you choose to follow. With this method, you can replicate their positions in your brokerage account every time they place a trade.
Copy Trading can be done manually or automated. Essentially, it involves an experienced trader broadcasting information to other traders. The professional trader typically charges a fee for their service. These situations can be an excellent way for new traders to make money.
Forex Signals
Forex markets throw out many opportunities during the day, but these opportunities can be hard to identify for new investors. However, new traders can use Forex signals to become aware of good trades.
Forex signals are trade recommendations provided by Forex signal providers. These services help you understand which currency pairs to trade, when to enter and exit the market, and how much profit you can take.
Of course, while there are many Forex signal providers out there, you must use a trusted, reliable provider with a good track record.
Making money in Forex isn't a guarantee. However, if you follow a few basic rules, you can mitigate the inherent risk in the market.
Develop and Test Your Strategy
The key to success in the Forex markets is to develop a strategy. However, strategies take a lot of time to formulate and perfect. Demo accounts are a great way to test your market hypothesis because they allow you to lose money without losing money.
Always Practice Good Risk Management
Good risk management is the foundation of successful trading. Even if you are developing a strategy that doesn't work just yet, sound risk management practices will ensure you hold onto precious capital.
There are lots of good ways to manage risk. For new traders, some essential principles are not using too much leverage. While there are advantages with leverage, the market can go against you and wipe out your balance.
Other good ways to mitigate risk are using stop losses and remembering never to risk more than 1-2% of your entire balance on any trade.
Consider Using Forex Bots
Automated systems now perform most trading of every type. These bots are excellent for several reasons. Firstly, they eliminate human error and the common mistakes that lose traders' money. Secondly, they are always on and always watching out for favorable market conditions. The only issue is that they are difficult to build.
Don’t Overtrade
This point is crucial for any new traders. While there is a lot of temptation to dive into trading, it's best to take a cautious approach at first. So, start with swing trading a small number of positions. This method will allow you to get a feel for the market once you've practiced on a demo account.
Don't open a large number of trades if you aren't experienced. Doing this can be disastrous.
Never Stop Learning
Some new Forex traders learn the basic concepts and stop there. However, there is so much more that they have to do to stay competitive. Financial institutions, banks, and other retail traders are always trying to learn and improve — and you should too. It's the difference between making and losing money. Always stay humble: you can never know enough. If you want to learn how to deal with laziness in Forex, read the Traders Union article.
Is Forex Trading Actually Profitable?
Yes. Forex trading is profitable if you have a sound system and practice disciplined risk management. Several elements work together to determine how much a trader can earn, such as how large their deposit is, what currencies they trade, and what platforms they use.
Even in 2023, a good novice trader can make around $100 per day trading Forex. To achieve this, they need to deposit at least $200, trade using the EUR/USD currency pair with an aggressive strategy and use leverage of 1:100. Of course, this $100 is based on a small opening deposit. Large deposits can lead to more significant gains.
Of course, not everyone will have the risk appetite for an aggressive strategy. Most Forex pros aim to make around 5-10% of their deposit each day and achieve this by avoiding excessive risk.
Can I Get Rich Trading Forex?
In the Forex market, anything is possible. This means that you can get rich trading Forex, but it also means that you can lose your funds. To give yourself the best chance, you need to become a student of the game who never stops learning and studying.
Additionally, developing a winning strategy takes time and perseverance. In short, it's hard to get rich overnight trading Forex; however, with commitment and discipline, you can make significant gains.
Forex markets have massive liquidity, with trillions of dollars traded per day. All this activity can present some great opportunities for traders with a good strategy and sound risk management. However, to make big money, you'll need to learn a lot about currency markets.
Not everyone is prepared to put in this kind of work. But nothing comes free in this world. To succeed at anything takes discipline and hard work.
Of course, there are several ways that investors can make money in the Forex markets without becoming experts themselves. Lots of passive investing opportunities exist, like using Forex signals or Forex managed funds.
Overall, Forex trading is a profitable activity for many people. However, it can prove too difficult for others and result in them losing some or all of their capital.
Antony Robertson,
Traders Union Financial Analyst
FAQs
What is the best Forex trading strategy?
There isn't one best trading strategy. Some strategies work for a short period of time, while others are better for specific market conditions or currency pairs.
Why does any trade that I open start at a loss?
The reason is the difference between asking prices for buying and selling. There is always a spread between these two numbers, so if you open your position at the buy price, the gap between this and the selling price will show as a loss.
What is margin?
Margin is the money you'll need to have in your broker account to open a position. Each broker has different requirements.
How much money do I need to start trading Forex?
Many Forex brokers will allow you to open an account with $1. However, typically the required amount is anywhere between $100 to $10,000.
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.
