Who is a forex trader?
|Who is a forex trader?|
In this article we are going to discuss who a forex trader is. A forex trader is a trader who trades foreign currencies in the foreign exchange market. Forex traders include a wide spectrum of different traders with different levels of experience and different trading goals, ranging from professional traders who work in a financial institute or are employed by a group of customers, to amateur traders who participate in this market for personal profit or just for fun.
To be successful in the forex market, you should constantly be aware of any movements in the market. Therefore, you should know more about this market and know what you should do to be a successful forex trader.
When we talk about forex traders, we are talking about those traders who intend to speculate on the price movements of the foreign exchange market. When the exchange rate of different currencies change against each other, some traders try to predict this fluctuations and make profit by buying and selling them at certain points.
Trading foreign currencies is far riskier than trading other asset classes, and it doesn’t suit everybody. While the chance for making a handsome profit exists, there is also the chance to loose a lot of money. Therefore, before deciding to become a forex trader, you should know how this market works.
How the forex market works
The foreign exchange market which is also known as “forex”, is the largest global financial market. More than 5 trillion U.S. Dollars worth of currencies are daily exchanged against each other in this market. This is 25 times the overall volume of global stocks. Forex market has several trading centers, the most important of which located in Tokyo, London and New York. This allows this market to be active 24 hours a day, 5 days a week.
Currencies in this market, are shown with three-letter symbols such as USD for the U.S. Dollar, EUR for Euro and JPY for Japanese Yen. Trades are carried out on currency pairs such as EUR/USD. The U.S. Dollar is almost present in every major currency pair in this market, since it’s the global reserve currency.
To be able to understand the mechanics of the forex transactions, we explain it with an example. Imagine that one GBP is equal to 1.1510 U.S. Dollars. This means that you can buy 1000 Great Britain Pounds with 1150 U.S. Dollars. If the offered price is 1.1511, the spread is respectively low. The difference between the bid (1.1510 USD) and the ask (1.1511 USD) price is called “spread”.
Imagine that you have bought 10,000 GBP at the exchange rate of 1.1511. If GBP reaches 1.1622, you can sell your position with a profit. Your profit would be 10,000 times the difference between the price you have bought GBP (1.1511) and the current price of GBP (1.1662). Therefore, your profit would be 151 U.S. Dollars.
How to become a forex trader
There are three ways to trade foreign currencies:
- In markets regulated by Commodity Futures Trading Commission
- In markets regulated by U.S. Securities and Exchange Commission
- In external exchanges (also known as over the counter market)
- When you exactly know where you want to trade, then you should choose a forex broker.
Most U.S. stocks brokers also allow their clients to trade forex. If you are already a member of a broker, you can probably start trading forex. In most instances, you just need to fill out an online request to start trading currencies. If you want to create a new forex account, start with a small deposit.
Several brokers allow you to start with deposits as small as 100 U.S. Dollars. They also may recommend you to deposit a little more to be able to efficiently manage your risk and money.
When you create your account, you can start trading as soon as you choose the currencies you want to trade. Currencies are always traded in the form of currency pairs in forex. When the value of a currency pair increases, it means that the value of the base currency has increased compared to the quote currency. Most novice traders only trade popular currency pairs such as the ones with USD, GBP and EUR. Because these currencies are the ones with the most liquidity and the lowest amount of spread. Spread is the cost that the intermediary (such as the broker) receives for providing services.
Forex trading risks
Forex trading is highly leveraged. The maximum amount of leverage in the foreign exchange market is about 1:50. But in some countries it can even exceed this amount. This means that you can buy a large volume of currency pairs with a relatively small budget. Novice traders may get attracted to this ability, but this means that the amount of potential loss is also increased. If forex traders are not careful, they can suffer loss even more than their initial deposit.
Another risk which we should take into account is that quotes are not unique. Therefore, many currencies are quoted against dollar, but there are no regulations and standards regarding the quotation in the forex market. Therefore, it’s important to know how currencies are quoted against each other, otherwise it could cause loss.
At last, you should be careful about scams. Whether you trade in a central exchange or over the counter, always look out for the scams. Keep away from those who tell you that they can make you reach in no time. Try to choose wisely and practice before you start trading in the real market.
What is a demo account?
One way you could start trading without risking your real assets is trading in a demo account. For example, Aron Groups Broker offers a training account and a virtual trading instrument, which allows traders to start trading with virtual assets. This may help you to learn how to trade forex and gain experience without risking your money. After that, you can start trading in the live account if your feel confident about your trading strategy and money management plan.
However, keep in mind that traders who trade currencies in the foreign exchange market, are looking forward to speculate on the fluctuations of different currency pairs. Trading forex could be very profitable, but it also contains significant risk of losing money.
Written by: Mohsen Mohseni (Aron Groups).