The world of finance is too deep, the more you dive into it, you would feel the depth. There are many market participants in this field, one of such is a forex trader also known as a currency trader.
FX Currency Trader Definition
A forex trader aka a currency trader or a foreign exchange trader is an individual that indulges in buy/sell of currencies on a forex exchange platform. The forex trader is appointed by financial institutions or banks to help them manage the cross-country transactions to ensure more profitability. Apart from this professional appointment, there are sole forex traders as well that have opted for exchanging currency as a bread-earning occupation.
The World of Forex Market
The forex market is also known as the foreign exchange currency market and is the largest financial market across the globe. Every day, more than $5 trillion are traded on forex exchanges around the world which is 25 times more than the value of equity being traded.
The main centres of the forex market are situated in Tokyo, New York and London. Though, apart from that, there are several more centres scattered in various countries. The bandwidth of these centres allows the forex market to remain in operation 24 hours except on weekends.
Three-letter abbreviations of currencies are used as a representation on the forex market. For example, for U.S. dollar, USD, for Japanese currency yen, JPY, for euro, EUR, and so on. For trades, transactions are stated in pairs like USD/JPY, etc.
The crucial currency here is the U.S dollar as it serves as the reserve currency of the world and thus most of the transactions done on the forex market involve USD.
Learn How to Be a Forex Trader
There are various ways and methods to become a forex trader.
The first step remains to be choosing a particular way through which you can trade currency. Primarily, there are three ways to trade currencies stated below.
- On an exchange governed by the Commodity Futures Trading Commission
- On an exchange governed by the U.S. Securities and Exchange Commission (SEC)
- On over the counter market (unregulated, off-exchange market)
For trading currencies, an individual needs to have a brokerage trading account. There are many popular brokers available across the globe like Interactive Brokers, FOREX.com, FBS, Pepperstone, HF Markets, etc.
If you already have a U.S stock broking account, you might have the privilege to trade forex on the same. While in some cases, you may have to fill an online currency-trading application.
For trading in forex, you may have to deposit a certain amount in your forex account, but it varies broker to broker. Though the more deposit you would keep in your account, the more flexibility you would get in terms of risk assessment by the broker.
After opening the account, you can trade your preferred currencies, but take a note that they are traded in pairs. It works on the formula of price rise in one currency leading to downgrading in another.
As a beginner, you are advised to trade only in popular currencies like the U.S dollar or British pound (GBP), so that you do not face challenges of liquidity. Also, as a beginner, you should trade forex on listed and regulated exchanges to avoid consequences on your new journey.
For trading in currencies, a forex trader has to pay a charge called the forex spread. It is the charge that a middleman/broker levies on a forex buyer and seller to manage the trade.
Illustration of a Forex Trade
Neil is a forex trader who wants to buy the British pound which is quoted at 1.1700. In simple words, Neil would pay $1170 U.S dollar to buy 1000 British pounds. Now, if the asking price (the price at which traders are willing to sell) is 1.1702, the forex spread would be low at only 0.02 (1.1702-1.1700) where 1.1700 is the bid price (at which people are willing to buy). The difference is known as the spread.
So, if Neil buys GDP at 1.1700 and sells it at 1.1800, he makes a profit of $100 U.S dollars.
Things to Be Aware of as a Forex Trader
Forex traders can get excited and overwhelmed with the hefty profits in currency trades, but it’s not all rosy. If you can win a big trade with a small amount, you can also lose a big amount when faced with downward consequences and trading situations. Just like your unlimited profits, you lose unlimited, too.
Forex trading comes with a set of complications and complexities, one of which is a lack of uniformity in placing and trading quotes. As an equity trader, you buy a stock in your local currency as it’s listed on your country’s stock market, here you do not have to worry about the conversation about currency. But when you are a forex trader, the trading is done in currency pairs as discussed above. Some trades are quoted against the American dollar, while some against Japanese yen. The lack of standardisation and regulations makes it difficult for traders to have ease and simplicity in trading forex.
Also, when trading currencies, as a forex trader, you have to be aware of the fraudulent spanning your hard-earned money. It doesn’t matter whether you opt for a regulated forex exchange or over-the-counter market; anyone can take advantage of your greed. Thus, it’s important that you avoid getting into ‘Get Rich Schemes’. There is nothing in this world that you can get without working for it. So, invest your brain when you invest your money in the forex market.
As a beginner, you may be worried about losing your money in the forex market, but with practice forex trading accounts, you can get a smooth time understanding the entire process. All you have to do is search for a broker that provides such facilities, one of such is FOREX.com.
Using such a practice account, you can have the experience of trading currencies without spending your own money. When you finally feel that you are confident enough to trade in the real market, go for it. It’s a boon for individuals wanting to dive into this field, without facing any severe consequences. All the best!