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. Financial institutions or banks appoint the forex trader to help them manage the cross-country transactions to ensure more profitability. Apart from this professional appointment, some forex traders 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 globally has the largest financial market. More than $5 trillion are traded on forex exchanges worldwide every day, 25 times more than the value of equity being traded.
The main centers of the forex market are situated in Tokyo, New York, and London. Though, apart from that, there are several more centers scattered in various countries. These centers’ bandwidth allows the forex market to remain in operation 24 hours, except on weekends.
Three-letter abbreviations of currencies are used as a representation of the forex market. For example, for the U.S. dollar, USD, for Japanese currency yen, JPY, euro, EUR, etc. 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.
How to Become a Forex Trader?
To become a forex trader, you need to open a forex trading account at a regulated forex broker. After practicing on a demo account and reading forex books, you need to deposit at least $1000 and start trading. However, if you have the experience, you can find a job in some trading prop company and start professionally trading.
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.
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.
You may have to deposit a certain amount in your forex account for trading in forex, but it varies from 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 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), not to face liquidity challenges. 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. The charge is 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 dollars 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 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 currency converter. 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 the Japanese yen. The lack of standardization and regulations makes it difficult for traders to ease and simplify trading forex.
As a forex trader, you have to be aware of the fraud spanning your hard-earned money when trading currencies. It doesn’t matter whether you opt for a regulated forex exchange or an over-the-counter market; anyone can take advantage of your greed. Thus, you must 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 you can get a smooth time understanding the entire process with practice forex trading accounts. 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 experience trading currencies without spending your own money. When you finally feel 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!