How to become a forex trader

How to choose forex pairs to trade

The first step in becoming a forex trader is to select the currency pairs you want to trade, as well as the time of day that you want to open and close your positions. Generally, beginners choose major pairs such as EUR/USD, USD/JPY, GBP/USD and USD/CHF. Generally, these currencies are associated with:

• High trading volume: this means there are many buyers and sellers trading these pairs and orders are executed fairly quickly and at competitive prices
• High liquidity: traders can enter and exit positions easily, which may decrease the potential of slippage or wide bid-ask spreads
• Lower volatility: these pairs can be less prone to sudden spikes in volatility than pairs involving currencies of emerging markets
• Tight spreads: a tight spread is generally considered to be more favorable for traders because it means that they’ll have to pay less to enter or exit a trade

Minor and exotic pairs are available for those interested in emerging markets, but there may be lower liquidity and/or higher volatility. Some of the common pairs include USD/ZAR, SGB/JPY, USD/SGD and CAD/CHF.

For beginners, the best time to trade forex is typically when the LSE and NYSE sessions overlap (between 3am and 7pm EST), as this is when the forex market tends to be most liquid.

Understanding what moves forex prices

Part of becoming a successful forex trader is knowing what influences the market. Foreign exchange movements are determined by a variety of factors, including:

Supply and demand

The general law of supply (sellers) and demand (buyers) also applies to the forex market. If there’s high demand for a particular currency but low supply, its value will likely rise. And, if there’s low demand and a high supply, its value will typically drop. The exchange rate between currency pairs shifts as a result of changes in supply and demand.

Central banks’ monetary policy

A central bank’s monetary policy can have a significant impact on the prices in the forex market. The bank has a heavy influence on interest rates and exchange regime settings – managing the value of its currency against others, currency interventions and other actions taken to influence the value of the currency.

Fiscal policy

Governments use fiscal policy to promote a stable economy with strong and sustainable growth. Forex traders would, for example, sell the currency of a country with a high debt ratio (low growth) and buy the currency of a country with low debt ratio (high growth) instead.

Interest rates and carry trades

‘Carry trade’ is a strategy used by institutional investors, who will sell a currency with a low interest rate and use the proceeds to buy a currency with a higher interest rate. The goal is to earn the difference between the two interest rates, known as the ‘carry’.

International trade

The value of a currency can be affected by the balance of trade between the country it belongs to and other nations. A country with a trade surplus, where it exports more goods and services than it imports, may have a stronger currency than a country with a trade deficit, where it imports more than it exports. This is because a country with a trade deficit needs to buy foreign currencies to pay for the imports, which can lead to a decrease in demand for its own currency and a drop in its value.

Macroeconomic statistics

Macroeconomic indicators, such as inflation, growth, and government debt, play a significant role in determining the value of a country's currency in the foreign exchange market.

To make informed decisions, forex traders and investors closely monitor key data points like consumer price inflation (CPI), producer price inflation (PPI), retail price inflation (RPI), interest rates, gross domestic product (GDP), national income, employment, and economic growth rates of different countries. This information is analyzed and used to make predictions about the future movement of currency prices.

External factors

External factors, such as war or natural disasters, can also have an impact on the prices in the forex market. For example, natural disasters can disrupt a country's production and supply chain, affecting its economic growth and making its currency less attractive to foreign investors. Similarly, wars can create uncertainty and instability, which can decrease the value of a country's currency.

Using an algorithmic trading system for forex

When you start trading forex, you might be overwhelmed by the busyness of constant market movements. One of the things that can help you to succeed as a forex trader is to use automated (or algorithmic) trading programs.

With us, you can use automated trading programs with MetaTrader 4. This third-party platform can be used to execute with us as a counterparty.

What is algorithmic trading?

Algorithmic trading, also known as algo trading or automated trading, uses computer programs and algorithms to execute trades in the financial markets. These algorithms are designed to analyze market data, identify trading opportunities, and execute trades based on a set of predefined rules and instructions.

This type of trading is typically used by institutional investors and hedge funds but is also available to individual traders through algorithmic trading programs and counterparties with platforms that support them. It allows for faster and more accurate trades and can also analyze and process large amounts of data in real time.

Benefits and risks of algorithmic trading

• Trades being executed efficiently

Trading algorithms are designed to analyze market data in real-time, and they can identify potential prices to buy or sell a currency pair at a faster rate than through manual processes

• Reduced risk of manual errors when placing a trade

Because the trading process is automated, the risk of human error is reduced and traders can be more confident that their trades will be executed correctly

• Incorrect parameters

If your selected parameters aren’t accurate, you could suffer bigger losses than if you monitored the markets yourself

• Compound losses

Compound losses can accrue due to the higher number of simultaneous trades and the speed at which they’re executed

How to start trading forex

1. Open a live account or practice on a demo account
2. Pick the currency pair you want to trade
3. Set your position size and manage your risk
4. Place your trade

It's important to approach trading decisions with the utmost care. You should utilize risk capital and limiting the amount of funds used for this purpose is suggested until you become more confident in your knowledge, skills, and strategy.

Trading forex is risky, and you are trading on leverage, which magnifies your exposure and can amplify your losses. Risk management is very important.

To help you grow your confidence, we offer a demo account with $10,000 in virtual funds.

Trading forex using leverage

When trading forex on leverage, you are agreeing to exchange the difference in the price of a currency pair from the time you open the position until you close it. When opening a leveraged position, a security deposit, or margin, is required.

You are trading the spot price of a currency and are speculating on a currency's value without owning the physical asset. You can go long or short, depending on which direction you think the market will move.

Remember, all trading incurs risk - and this risk is multiplied when trading on leverages. Always have solid steps in place to manage your risk.

Becoming a forex trader summed up

• The first step in becoming a forex trader is to select the currency pairs you want to trade, as well as the time of day that you want to open and close your positions
• Foreign exchange movements are determined by a variety of factors, such as supply and demand, central bank monetary policy, fiscal policy, interest rates and more
• Forex traders can use an automated trading system to trade currency pairs, which means they don’t have to monitor the markets at all times
• With us, you can trade spot FX using leverage