Published on December 23rd, 2020 at 9:42 am
Rule number one: Don’t lose money. Rule number two: Don’t forget rule number one.
Warren Buffett
How to Become a Forex Trader
We all can become Forex Traders!
Forex trading is no different than regular business – it’s simply buying and selling things.
All we need to do is to know what to buy and sell.
Here, we buy and sell financial assets like currencies, commodities and stocks.
Just a few decades ago, financial trading was confined to telephone brokers.
Now we can trade in Forex markets anywhere, anytime.
Internet gave us the power to join the markets and access all the information we need.
Like here and now!
Who Can Trade Forex?
Are we interested in living on the profits we make for ourselves?
Because everyone can trade Forex and create a strong income source.
Previous experience is obviously useful, but not necessary!
Here, we learn to trade all the basics we need to trade Forex markets.
After, we will do some training and practice (which are explained in next lessons).
Once refined, our knowledge and skills will turn into habits that generate profits.
Who Trades?Why They Trade?
LaypeopleCreating a secondary income source; gaining financial freedom
ProfessionalsLiving on Forex profits as the main income source (former laypeople)
Portfolio ManagersManaging portfolios of other people to gain commissions
InvestorsHedging investments with a cost-effective financial instrument
InstitutionsHedging investments and managing risk exposure in the markets
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Choosing a Forex Broker
Forex Brokers are digital trading platforms where we can buy and sell CFD instruments of financial assets.
We deposit our funds to, conduct our trades through, and withdraw profits from the broker.
Broker trustworthiness is based on legitimacy, trading services quality and customers support.
Choosing the right Forex broker requires us to evaluate three aspects: validity, reliability, and quality.
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Validity of a Forex Broker
Regulation: Regulation is #1 priority. The broker we choose must be regulated in our jurisdiction and apply the required regulative procedures. A broker’s compliance to regulations shows its legality and commitment to working in the traders’ best interest.
Financial Security: The broker must be separating traders’ funds from the company’s operational funds and keep them in segregated client accounts in trustworthy banks.
Personal Data: Our personal data must be kept secure in accordance with applicable laws and best industry practices such as encryption technologies and access limitations.
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Reliability of a Forex Broker
Order Execution Speed: Our trading orders must be executed instantly at the market price we see on the platform. Execution delays can impair our profitability.
Account Transactions: Broker must be working with reputable payment providers. Deposit and withdrawal transactions must be processed rapidly, which shows serious credibility.
Products & Trading Conditions: Product range should contain the assets we are interested in, and the trading conditions must be easy-to-read and published transparently.
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Quality of a Forex Broker
Customer Service: Having a dedicated account manager to conduct our account affairs, to guide us to continue gaining more knowledge, and provide market information can be crucial as we gradually invest more effort to become a full-time professional Forex trader.
Trading Platforms: Accessibility to markets from multiple mediums such as desktop, mobile, and web browsers is important when it comes to seizing opportunities whenever, wherever. Our trading platform must be fully equipped with trading and analysis tools.
Trading Tools: While not a necessary indicative, developing proprietary trading tools such as market sentiment analysis, trading signals or social trading features shows the broker’s subjective investment into the success of their traders.
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A Day in a Forex Trader’s Life
As Forex traders, we enjoy the benefits of having our own unique schedule.
Wake up early in the morning, have your coffee, breakfast and shower.
Once ready for the day, we check the financial markets and see today’s events.
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A Simple Example of Forex Trading
United States of America is scheduled to publish an employment report in the afternoon.
We check our trusted analysts’ reports; employment numbers are forecasted to drop.
As a result, the U.S. Dollar might lose value, and EUR/USD currency pair may increase.
30 minutes before the report, the exchange rate of EUR/USD is 1.1250. (1 EUR = 1.1250 USD)
We buy €10,000 by investing $11,250 and wait until the report is published.
The results are in, employment numbers drop, USD loses value.
EUR/USD rises 100 points to reach 1.1350.
We close our position by selling the €10,000 for $11,350.
Our earning was $100 in 30 minutes; $1 for each of the 100 points.
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Forex Trading With Leverage
In the example above, we traded without using any leverage. Let’s understand what the trademark feature of Forex trading, Leverage, affects our trades.
Leverage magnifies our total capital; we can open larger positions with smaller margins, and our profit per point-movement increases.
If our broker offered 100:1 leverage in EUR/USD trading, we could have used it in two ways:
Open the same position with only 1% of the invested capital, have the same profit-per-point
Buying €10,000 by investing $112.50 (instead of $11,250)
Earn $1 profit per point movement (still earning $100)
Open a position 100 times larger with the same capital, have 100x larger profit-per-point
Buying €1,000,000 by investing $11,250 (same capital amount)
Earn $100 profit per point movement (earning $10,000)
However, it’s very important to note that our risk would increase in same proportions. We will explain how leverage works in more detail in the Leverage section.
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Trading Styles
A trading style is a specific pattern of opening and closing positions.
It determines the frequency, size, direction, duration, and risk/return ratio of our trades.
Our trading style is based on personal goals, assets of interest, and attentional capacity.
Trading styles can be asset-specific or generalised to the entire portfolio.
There are several common trading styles, based on their duration:
Short-Term Trading Styles
Short-term trades are known as day trading.
The duration of positions can range from a few seconds to a few days.
Short-term traders capitalise on transient market reactions, regardless of the long-term trend.
Medium-Term Trading Styles
Medium-term trades are known as swing trading.
Trades can last from a few days to a few weeks and utilise both long and short-term trends.
Long-term trends inform about the general direction, short-term movements signify the course.
Long-Term Trading Styles
Long-term trades are known as position trading.
Positions are longer than a few weeks and ignore intraday price fluctuations.
Floating losses and rollover costs can accumulate, portfolio margin must be carefully considered.
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Every trader has strengths and weakness. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and bad in your own approach.
Michael Marcus
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We are ready to become a Forex trader; it’s time to learn what to trade!
