How To Trade Forex Like A Pro

Trading forex is high risk and can be complex given the vast daily trading volumes, frequency of currency movements and myriad factors and influences, inside and outside the markets, that impact the value of a currency.

When you first start trading forex, it is worth spending plenty of time learning about how the markets work, the contrasting regulations between brokers – particularly those in the US – and the available safeguards to protect your investments if the market makes a sudden move.

The Basics Of Forex

Forex is the currency exchange market used by governments and central banks, commercial bodies that trade, export or import in a foreign denomination, while institutional and retail investors play the markets to try to make gains.

The market is global and decentralised – no assigned supervisory body or institution is responsible for regulating forex.

Instead, the brokerage networks largely set prices, and trades are executed electronically between traders and brokers.

Unlike conventional stock exchanges, forex does not close at the end of the trading day and opens 24/7, Monday to Friday.

Currencies are traded internationally, with the primary central hubs in Hong Kong, Singapore, Paris, Sydney, Frankfurt, London, Tokyo, Zurich and New York. The forex market starts in Hong Kong and Tokyo when the trading day ends in America.

This scenario means that forex price quotes change almost continuously, and there can be high activity levels overnight.

Steps To Start Trading Forex

The first essential phase before making live trades is to learn as much as possible about forex – the principles are not complex, but the trade and transaction types can be, and the outcomes can be significant.

Specialist forex brokers and investors use advanced technical trackers and charting to analyse every movement in the currency pairs they trade and plot trends and trajectories, forecasting changes to make a profit at the right time.

Currencies move differently from equity stocks and can be affected by various circumstances, including political and economic announcements.

The practicalities of creating a forex account and developing an approach are as follows.

1. Register with your preferred forex broker

You need a trading account with one of the many brokerages and online trading platforms. There are pros and cons to each, with some charging commissions and others relying on spreads to make a profit based on the difference between buy and sell prices.

There are also different account types, and novice forex traders often begin with a micro account because the capital requirements are lower, and trades are possible at smaller lot sizes.

A lot is a standardised block of currency units used throughout forex. For example, micro trades comprise lots of 1,000 units, in contrast to 100,000 units for standard forex accounts.

2. Define your forex trading approach

Anticipating market movements can be tricky, but if you have a trading strategy, you can refer back to this to decide how to respond to different situations and the key goals you will try to achieve.

For example, your forex strategy should set out:

  • How much you are willing to risk as a total capital investment.
  • Higher ceilings on individual trade risk exposure.
  • The risk you are happy to accept per transaction.
  • Points at which you will exit your position.

Forex trading allows leverage, where you borrow funds from the broker against a margin or deposit.

A defined approach to leverage is essential, as this can often amplify profits and exacerbate your exposure to losses.

3. Monitor your positions

Even though forex is open day and night, you should check how your positions perform at least once a day – assuming that you are not engaged in scalp trading, where positions open and close in short time frames.

If you have a pending position, you need to verify that you have the balance available to proceed or assess whether any changes trigger an exit.

Most forex brokers provide account tools and features where you can analyse how things are going or set automated trades to execute if a currency pair reaches a point at which you wish to exit or enter a position.

4. Maintain a steady, unemotional mindset

Forex can be stressful and challenging, with much uncertainty and immediate decisions to make based on your market knowledge and perception of other events that might impact your trades.

The best traders maintain an even keel, relying on their strategy to keep their trades in line with their objectives without any temptation to make bad knee-jerk decisions.

Discipline, patience and diligent marketing monitoring are the most important aspects of successful forex trading.

Hedging In Forex Trading

Hedging is primarily associated with businesses that trade overseas and face risks when currencies fluctuate and they are buying, selling, importing or exporting in a different denomination than their own.

The markets allow these organisations to set up a hedge against currency risks, using fixed rates to quantify what planned transactions would cost.

Traders might engage in forwards or swap markets to confirm an exchange rate rather than hoping that the rates move in their favour when they need to finalise a transaction.

Forex hedging is also available through the futures market, with contracts validated by a central authority using standardised agreement templates.

The risk is that currency futures tend to be less liquid than forwards because the latter are not centralised and are supported by the global interbank system.

Speculating In The Forex Market

Traders can also use forex to speculate, examining the many drivers behind currency movements, such as:

  • Interest rates
  • Monetary policy
  • Geopolitical instability
  • Economic strength
  • Trade demand
  • Tourism rates
  • Supply and demand

Forex traders will try and predict future circumstances or known events and assess how they are likely to affect the markets – if they assume one currency will become stronger, it means another will weaken.

Currencies are traded in pairs, so the equivalent value of one depends on the purchasing power and demand for the other linked denomination.

How To Trade Forex Like A Pro FAQs

What do I need to know to start forex trading?

One of the fundamentals is the bid-ask spread, which shows the difference between the lowest sell and highest buy prices for the currency pair.

High spreads often point to lower liquidity, and understanding the spreads and what they mean for your trades and open positions is important.

How can I trade forex successfully as a beginner?

The best approach is to have a clear, detailed strategy incorporating proven methodologies and techniques.

For example, you must ensure you have the discipline to follow your plan, avoid getting caught up in spiralling trends, and take plenty of time to conduct research and market analysis before taking a position.

Sticking to the defined rules you have set for yourself ensures that the trades you make all tie into your overall objectives and strategy.

Why do so many people lose money trading forex?

Most traders lose money because they need to learn more about how forex markets move or other factors influencing their trades.

Traders must recognise why a trade has failed and update their strategy to include safeguards against repeating mistakes.

Profitable traders often have advanced tracking tools and technological resources to grasp the bigger economic picture and predict how currencies will fluctuate – sometimes many years in the future.

How much risk is associated with forex trading?

Forex is volatile and considered higher-risk than many other investment markets, but it isn’t a case of random gambling or hoping a major currency continues to climb.

There is considerable exposure to losses since forex is affected by multiple variables. Still, with proper research, market oversight and a comprehensive understanding, traders can mitigate their potential losses.

Forex Illustrated reports that the proportion of traders making losses ranges from 65 per cent to 89 per cent – an average of 77 per cent.

To become one of the 23 per cent of traders making gains, you need as much information as possible to make informed judgments and calculated guesses.

Can I make a career in forex trading?

Usually, the only people who trade forex full-time are brokers, fund managers, institutional investors, or those who manage their forex assets.

Trading forex is challenging, and although there is a possibility of making significant gains, this usually only applies to a fraction of traders with the required skills and knowledge.

Most retail investors dabble in forex as a side hobby or to generate a second income rather than as an alternative to a more stable career.

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