What does it mean to be a forex trader?
A forex trader is somebody who buys and sells different currencies on the global foreign exchange market. That’s not quite the full job description, though: some are full-time professional traders who spend most of their day trading forex either on their own behalf or as part of a fund’s management team. The term also describes part-time investors who dabble in forex for a side income. These days, forex traders typically work in front of a screen instead of in “the pits” as in the picture below.
Picture from the CME trading floor
A forex (FX) trader’s job is to buy a currency when its value is low and sell it once it’s high in order to earn a profit. In a sense, it’s the same as a market trader selling fruit and vegetables they bought from a farmer at a markup. Though this analogy is far from exact, it does apply to speculators in financial markets. The market trader takes on risk because they cannot be sure of selling all their produce and thus covering their costs; however, in their case, the risk is well-understood and the fruit and veg can be priced appropriately.
Foreign exchange traders, by contrast, never know for certain whether they will be able to sell the currency they have bought at a higher price, making a profit, or be forced to sell it at a lower price and make a loss. The forex trader must guess, intelligently, which way the currency will go in the next few hours, days, weeks, or months, using techniques like technical or fundamental analysis.
What is forex trading?
Two currencies, one of them often being the U.S. dollar, can be traded against one another; this facilitates both import/export and currency speculation. In the latter arena, the goal is to profit from forex movements by buying a currency that’s about to rise using another currency that’s due to weaken. In broad terms, you can think of it like day-trading stocks, but with currencies on the forex market instead of shares on the stock market.
Of course, there’s a lot more to understand before actually risking real money on currency movements. Fortunately, there’s a wealth of information available on topics like forex risk management, trading strategies, and technical analysis.
How to become a forex trader
Most people who trade forex work for themselves. They invest in various currencies using their own money, meaning that all the risk and reward from each trade falls on them.
There is almost no barrier to entry to becoming a forex trader – indeed, the same applies to trading stocks, betting on binary options, or accessing almost any other type of financial market. Any individual can choose to invest their pension money in a mutual fund or sign up with a FX brokerage to trade forex. However, the ease of getting started should not be taken to mean that trading itself is straightforward. Consistently coming out ahead requires specific forex education and experience to become proficient.
Getting a job in forex is typically done by applying to large international banks, hedge funds, and other financial institutions that operate foreign exchange trading departments. At least a bachelor’s degree in business or a math-heavy field like physics or computer science is required. If successful, you would start as a junior trader or trading assistant and gradually work your way up. Professional forex traders receive a salary plus performance bonuses. However, these are highly desirable jobs and competition for them is fierce, even at the entry level.
What a forex trader actually does
These days, forex trading is almost entirely electronic, so there is very little need to interact with or build relationships with other forex traders, as was once the case. Formerly, traders spent a great deal of time negotiating trades over the phone or in person on a trading floor.
A modern foreign exchange trader spends his time reviewing the various factors that affect national economies and staring at forex price charts. All this information is used to determine whether a currency is over-valued or under-valued relative to another currency. If the trader finds a currency that they believe is undervalued, they will buy it with the hopes of selling it later at a better exchange rate.
All the factors that go into whether to make a buy or sell decision, when put together, is referred to as a trading strategy. Some forex traders focus on price momentum to determine when to buy into trending markets, while others use mathematical indicators to determine if a currency is overbought and due to fall, or oversold and due to bounce. Since forex trading is essentially a zero-sum game, the early bird or the best-informed owl tends to walk away with the prize.
The actual buying and selling is done through an online trading platform, which gives the trader access to currency markets which would otherwise only be available to banks and institutional investors. Forex platform software typically includes price data, charting and trade execution services all rolled into one convenient package.
A foreign exchange trader’s day consists of managing their account, creating reports about planned and executed trades, analysing price charts, and reading the news from various countries. They will spend almost all of their time sitting in front of a screen. If you are looking for a physically active way to earn money, forex trading might not be the right choice.
Skills needed to be a forex trader
Traders must be able to act fast to take advantage of newly incoming information, be it a sudden change in exchange rates or some news that could soon influence them. This requires a combination of self-confidence and “guts” to make the correct decision about whether and how to act. Placing a trade is affectionately known in the financial industry as “pulling the trigger”; due to the uncertainty involved, it can be hair-raising.
Those who are most comfortable with the high degree of risk that needs to be taken on a regular basis have the best chance of success. Managing this risk requires a level head. Wrong decisions are inevitable no matter how smart you are, but successful traders are those who tend to correct those mistakes before their P&L (profit / loss) record suffers a serious setback.
Analytical skills are also a requirement, but ranks surprisingly low when it comes to making a difference between those who become consistently profitable in trading and those who fail to make the grade. Forex traders must be comfortable with basic math, but today’s online trading platforms and information supplied by forex brokers generally do all the necessary heavy lifting, including by reporting trade size, currency converter, margin requirements and so forth.
A Forex trader’s daily routine
Forex traders typically wake up early so they can review any changes in their existing positions in overnight markets. Just like trading bitcoin and other digital currencies, trading fiat currencies can be done 24 hours per day, so a trader’s profit-and-loss can change while they are asleep.
After having breakfast, a trader will often check the forex rates, stock indices, precious metals, and other related financial markets, often using a variety of graph formats. They will also review the latest news headlines and take a look at the economic calendar. This gives them a perspective on what’s happening in the financial markets overall.
How much actual buying and selling a trader does throughout the day will depend on their trading strategy. Scalpers buy and sell currencies all day, specialising in quick in-and-out trades. Day traders will typically open a trade near the start of the day and close it before the end of the trading session.
The bulk of a forex trader’s time is spent doing analysis to look for new opportunities, making sure the ideas behind existing trades are still valid and improving their trading strategy. New traders will often get some help with their daily forex analysis through the use of a forex signal service, or invest time with a forex trading course or forex mentor.
How to practise forex trading
If you like the sound of being a forex trader, a reasonable first step is to a demo trading account on whatever online trading platform you prefer. This allows you to get your feet wet, placing imaginary trades in pretend money so you can practise trading within a risk-free environment.
