Forex trading is unlike any other market-based activity. With over $6.6 trillion moving through foreign exchanges daily and a tiered-market system, traders can make or lose a small fortune in a very short period of time. Making a living at it requires patience, discipline, and dedication.
The forex market is unique due to the sheer number and variety of traders who are active in the space. Unlike stock exchanges, forex markets are open twenty-four hours a day and span the entire globe. There are two tiers: interbank and over-the-counter (OTC).
Interbank Market: Major banks on six continents make up the interbank market. Each of them has a currency trading desk that is dedicated exclusively to forex trading. The minimum trade amount is one million units of the currency being traded, but most trades are between ten and one hundred million units.
Over the Counter (OTC) Market: The OTC market, otherwise known as the retail market, is where you’ll be spending your time as a forex trader. It was established in 1971 as the International Money Market by the Chicago Mercantile Exchange. Today, you can trade on multiple platforms, including OANDA, Forex Capital Markets, LLC, and Forex.com.
Currency trading has been around for hundreds of years. Initially, it was only done by large corporations that did business in multiple countries. In 1973, the Nixon administration abolished the “gold standard,” which pinned the value of the dollar to the price of gold. That is what opened the doors for forex exchanges to be established.
Getting Started with Forex Trading
The SEC requires you to maintain a minimum of $25,000 in a trading account to day-trade on the stock market. Some forex brokers will let you get started with as little as $50. There is no legal minimum to open an account. It’s what makes forex so appealing to the masses.
Of course, if you want to make any real money, you’ll need to start with more than $50. Risk management recommendations for a single trade are 1% of your total account. Start with $1000 and you’re looking at $10 a trade. That’s good for a hobby, but not to make a living.
Start with $10,000 and your average trade will be roughly $100, if you manage risk properly. That’s a level where you can begin treating forex trading like a regular job. Don’t think of it as a nine to five, though. Your time zone will be irrelevant when you start trading.
Don’t quit your job and cash in your 401(k) to trade forex. Start slow. Do this part-time, to begin with. There’s a lot to learn and you won’t get it all from reading this article. We can provide some guidance, but the experience is what will help you achieve long-term success.
Understanding Forex Trading Terminology
Equities and stock options are traded in the currency of the country where the stock exchange is located. Forex involves a pair of currencies, so the value is expressed in the currency of the second unit of the pair. For instance, EUR/USD represents the value of the Euro in US dollars.
Currency movement in forex trading is registered in units called “pips.” For most currencies, a pip is 1/100th of a percent. Pairs trade-in “lots.” There are three types of lots:
Micro: 1000 units
Mini: 10,000 units
Standard: 100,000 units
Confused? We’ll simplify it for you. If you buy a micro lot of EUR/USD, you own 1000 units with a pip of 10 cents per unit. As the currency goes up and down, you’ll either make or lose money in those increments. For mini or standard lots, the pip would be $1 or $10, respectively.
When you buy your lots, you can set “stop-loss” parameters. These are also measured in pips and they are designed to protect the trader. Let’s say you buy that same micro lot and set the stop-loss for ten pips. That’s a loss of $1, at which point a sell order will trigger.
Technical and Fundamental Analysis for Forex Trades
Currency values are affected by global affairs, national events, and central bank movement in the forex space. Central banks typically hold billions in foreign exchange reserves. At any point in time, they could trade lots of their own currency for another, causing price fluctuations.
The Swiss National Bank was recently put on a US watchlist as a “currency manipulator” due to actions they took to devalue the Swiss Franc. Bank executives have claimed the actions are “necessary” because a strong currency could weaken their economy.
Knowing this, a trader can count on the Swiss franc (CHF) decreasing in value when it hits a certain level. That’s a fundamental analysis based on public statements made by the Swiss Bank. You will have gained an advantage in that market just by reading this article.
Interestingly, technical analysis will reveal the same insights. It also gives you a more accurate picture of when exactly you should expect the downtrend. Due to that predictable volatility, this currency can be traded using purely technical analysis.
Choose a Trading Style that Suits You
Currency values fluctuate quickly, so you’ll typically see the classic saw-toothed pattern of uptrends and downtrends needed for scalping. You’ll also see momentum swings that remain fairly steady for longer periods of time. That’s where the real money can be made.
With forex, you also have the option of being an event trader. This is a system where you’re tracking world events such as unemployment numbers, monthly government reports, and financial projections for national markets. All of these affect currency values.
Another factor to take into account when choosing a trading style is the dedication needed to trade in a market that’s open twenty-four hours a day. You can’t function without at least some sleep. What tools do you have available to help automate some of the processes for you?
Before you read the next section, review what you’ve learned here about forex and evaluate your decision to enter this market. It’s not that we want to discourage you. If your goal is to make money with this, you’ll need to be one hundred percent committed. Are you?
Realistic Income Projections for Forex Traders
Anyone can make a career out of trading forex, provided they follow some simple suggestions. The first is risk management. We mentioned above that you should not risk more than 1% of your account balance on a single trade. That gives you the bandwidth to make 100 trades a day.
A close second on this suggestion list is to have a trading strategy. Don’t go in blind, thinking that your “gut instinct” is going to make you successful in this market. Those who go with the gut end up sick over the losses they incur. Do your research and be prepared.
Suggestion three is a combination of leaving emotions out of it and setting proper expectations. A good win rate in forex trading is 55%. Expect more than that and you will become emotionally distraught. As long as you’re winning more than half the time, you’ll be okay.
Assume that you’ll make 1% to 3% of your total account balance per day. A day trader with a $5000 account balance, sticking to the guidelines we’ve laid out here, will generally make $50 to $150 per day. Scale that account to $10,000. Double your earnings. Get it?
Using Forex to Hedge Traditional Investments
Active trading isn’t for everyone. If you’re more of a passive investor, you can still get into the forex market by adding currency ETFs to your portfolio. An example of this is Currency Shares Euro Trust (FXE). It tracks the changes in the value of the Euro relative to the dollar.
The volatility of FXE and other currency ETFs is high enough for a trader to make some money on it. Investors use these types of funds to hedge portfolios. Gains on a national currency could easily offset losses on a local corporation. It’s generally safer than an options play.
If you want to make money trading forex, treat it as another tool in your toolbox. It requires dedication to be successful. That doesn’t mean exclusivity. The best traders know how to play in multiple markets. Learn forex. Dabble in options trading. Buy stock. It’s called diversity.
All that being said, you definitely have the ability to earn a living just selling forex. Take the time and learn the business. You can do well. While you’re at it, try to get a better understanding of all financial markets. Start by going to Tickeron’s Knowledge Base. Click Here to learn more.