Forex trading, just like stock trading, offers a lucrative opportunity for anyone who wants to make money in the financial markets. However, research suggests that most people who start trading in foreign exchange do so unprepared and end up losing their money. Some of these people will never return to forex trading, while others will prepare, learn and start seeing profits. Some people believe that the foreign exchange rates are largely driven by large institutional traders and retail traders will always lose money. However, this is not true and if played with caution, knowledge and discipline, forex trading can be profitable and even become a fulltime source of income for anyone.
If you have ever felt like exploring the world of forex trading, then this article will provide you a few steps and guidelines that you can follow to become a forex trader.
The first thing is to understand how the foreign exchange market works and why currencies fluctuate. In the foreign exchange market, we are essentially exchanging one currency for the other. The simplest example is when you travel to another country. Say you are travelling from the US to Hong Kong. You have your money in American dollars. However, when you arrive at Hong Kong, you need Hong Kong dollars to shop or pay your bills in Hong Kong. You go to a money exchange and exchange your American dollars for Hong Kong dollars. The current exchange rate is 1 USD = 7.75 Hong Kong dollars. So, if you pay USD 100, the exchange dealer will give you 775 Hong Kong dollars in return. Since you purchased Hong Kong dollars using your American dollars, in reality you have actually contributed to the demand for Hong Kong dollar. In this example, the amount was very small, just USD 100. However, in the entire world billions of units of different currencies are traded based on the demand and supply of each currency. For example, if the exports of China are becoming competitive, the importers from other currencies will import Chinese goods, increasing the demand for Chinese currency. It’s this supply and demand economics of these currencies that drive the exchange prices.
A successful trader who can identify the trends between currency pairs stands a good chance of earning a decent profit from these price fluctuations. Before you start trading, it’s a good idea to study a few currency pairs such as USD/EUR, USD/JPY, USD/GPB, etc. and see how they have trended in the past and what factors affect them frequently.
Once you have a decent knowledge of the market functioning, you should trade using a demo account that can be opened at any of the forex brokerage firms. Forex accounts are online accounts and you can start trading within minutes of opening the account. A demo account works exactly the same way as a real account, except you are trading with fictitious money. However, your actions are very much real and you can try out your strategies and see if you’re making money. While practicing in your demo account, you should get familiar with data feeds, reading charts, margin calculation, P&L calculations, etc.
Once you are confident, you can open a live account and start trading in real-time. You will need to link your bank account and/or deposit money as initial margin, which may be as low as $500. Most brokerage accounts will also provide you leverage that you can use to enter into larger trades.
The most important factor that differentiates a successful trader from others is the discipline. Forex trading requires you to be very disciplined and planned in terms of how you select your trades, when to enter and when to exit. You should also keep a journal of all your trades along with notes on profits and losses. This journal can be a useful review tool. You can review which strategies worked and which didn’t and the reasons behind it. This will enable the reduction of mistakes you make in the future. When you identify a successful strategy, you can work the strategy to make consistent profits.
In the end, one must keep in mind that forex trading does involve risk, and you may end up losing your investment if you’re not careful.