The Trillion Dollar World of Forex

October 26, 2015

You probably heard from someone or read from somewhere about a character who has been making 6-figure salaries while working at home as a ‘Forex trader’ and wonder “how can I do the same?” Forex trading has always been a perplexing realm in the professional world. The closest thing people associate with Forex trading is Wall Street, and even Wall Street is its own sophisticated, closed-doors industry. You will rarely find any FX trader booths at job fairs or listings of “traders wanted” at online job sites. Nevertheless, make no mistake as there is money to be made as an FX trader and this guide will hold your hand as you walk towards the journey to becoming a profitable, professional Forex trader.

What is the Forex Market?

Forex, foreign exchange, and FX are commonplace names used to denote the $5.3 trillion market involving the exchange of different currencies including major and exotic pairs. It is quite similar to the stock market but instead of shares of companies, retail and commercial traders attempt to speculate on the future price direction of foreign currencies. Retail traders comprise a small portion of the market, with the larger participants being international banks and hedge funds that have billions of dollars in available capital and buying power.

Forex is subdivided into 5 categories – spot, forward, futures, swap, and option. Spot Forex is the most popular FX transaction perhaps because of its simplicity. Regardless of what specific FX category you wish to participate in, every transaction will involve a broker’s fee, which is usually charged from your  automatically when opening and closing a position. For beginners, try to learn and master your skills in spot FX trading first before you dive into swaps and options, which tend to be more complex.

How It Works

Trading the FX market is very simple and straightforward. However, it does require the participant to have a minimum amount of experience using a computer and related software. Via a platform provided by your broker, you place buy or sell orders of currency pairs you want to have capital exposure in. For example, buying or going long EUR/USD means that you are effectively purchasing

Euro using US dollars. If the value of Euro increases relative to US dollars, then you would have made a profit. Vice versa, if Euro devaluates against US dollars, you will have incurred a loss.

Every currency pair has a corresponding margin requirement, rollover rate, and pip value. Margin requirement means the actual amount of capital money used for a certain trade. For example, if you have $1,000 of your own money invested in the trading account and you are planning on trading a currency pair with a margin requirement of $140, that amount will be used to open your trade. If the available margin runs out due to either one large losing trade or multiple trades with small losses, you will get margin called, which simply means the broker will have to force close the position and liquidate any assets.

Getting Started With FX Trading

There are two ways to start your FX journey – either open up a demo account first and test your skills for a few months or open a live account and trade with real money. Demo trading has proven to be beneficial for some novice traders but isn’t always the most suitable option for others.

Some professional traders argue that demo trading removes the emotions of winning and losing real money thus leading to an ineffective training ground for beginners. Understand yourself and how you best learn and master new skills and then decide whether or not you should open up a demo account first.

Identifying your strategy or approach should be the next step towards FX trading. In the past, value investing or long-term investing was the primary strategy used by market participants to generate profits. But over the past two decades, different strategies have popped up, such as day trading, scalping, carry trading, and news-based trading. To trade profitably and consistently over the course of your trading career, you should be able to identify a strategy that melds with your personality and risk profile.

Aside from technical approach, serious traders should also establish ground rules that guide their actions every day. Identify minimum and maximum loss per trade, number of trades open at any given time, currency pairs you should be focusing on, and times of the day that are too volatile and should be avoided. Ideally, start a journal or an online record of your trades in detail. Data accrued on your journal over time can provide a wider view of your trading strengths and weaknesses and enables you to recalibrate your strategy by looking at detrimental habits.