5 Steps To Becoming A Forex Trader


Wading Into The Currency Market

Whenever you devote money to trading, it is important to take it seriously. For traders who are getting into the forex (FX) market for the first time, it basically means starting from square one. But new traders don't have to be left in the dark when it comes to learning to trade currencies; unlike with some of the other markets, there are many free learning tools and resources available to light the way.

1. Find A Good Broker

In order to ensure that the money you are sending will be safe and that you have a jurisdiction to appeal to in the event of a bankruptcy, you want to find a large market maker that is regulated in at least one or two major countries. Furthermore, the larger the market maker, the more resources it can put toward making sure that its trading platforms and servers remain stable and do not crash when the market becomes very active. Finally, you want a market maker with a larger number of employees so that you can place a trade over the phone without having to worry about getting a busy signal.

2. Check Your Broker's Stats

In the U.S., all registered futures commission merchants (FCMs) are required to meet strict financial standards, and to submit monthly financial reports to regulators. You can visit the website of the Commodity Futures Trading Commission to access the latest financial statements of all registered FCMs in the U.S. Another advantage of dealing with a registered FCM is greater transparency of business practices. The National Futures Association keeps records of all formal proceedings against FCMs, so traders can find out if the firm has had any serious problems with clients or regulators by checking the NFA's Background Affiliation Status Information Center (BASIC) online.

3. Test Drive Software

Once you've found a broker, the next step is to test drive its software by opening a demo account. The availability of demo or virtual trading accounts is something unique to this market and one that you'll want to exploit it to your advantage. Your goal is to learn how to use the trading platform and, while you're doing that, to find the trading platform that suits you best. Most demo accounts have exactly the same functionalities as live accounts, with real-time market prices. The only difference, of course, is that you are not trading with real money.

4. Do Your Research

You should never trade impulsively, so you need to be able to justify your trades through research. Because the FX market is primarily a technically driven market, the best book that you can read as a new trader is one on technical analysis. Seasoned foreign exchange traders also refer to major newspapers for international news. Once you have a solid foundation in FX trading, you need to keep up to date on daily fundamental and technical developments in the FX market. A variety of free FX-specific research websites, which can be found easily on the internet, will also do the trick.

5. Sort Out Trading Systems And Signals

Many traders wonder whether it's worthwhile to buy into a system or a signal package. Systems and signals fall into three general categories depending on their methodology: trend, range or fundamental. Fundamental systems are very rare in the FX market; they are mostly used by large hedge funds or banks because they are very long term in nature and do not give many trading signals. The systems that are available to individual traders are typically trend systems or range systems - rarely will you get one system that is able to exploit both markets, because if you do, then you have pretty much found the holy grail of trading.
Related Articles
  1. Investing News

    6 Signs You Are Addicted To Investing

    An addiction to trading can ruin your life and relationships. Not to mention the monetary costs. There are telltale signs that you've gone too far.
  2. Forex Fundamentals

    Oil & Currencies: Understanding Their Correlation

    Crude oil shows tight correlation with movements in many currency pairs.
  3. Forex Fundamentals

    3 Reasons The Mexican Peso Is So Liquid

    Mexico's vast petroleum reserves and close proximity to the United States add considerable liquidity to the Mexican peso.
  4. Trading Strategies

    How to Day Trade Sector ETFs Every Day

    Sector ETFs provide a liquid asset that day traders can trade each and every day. Here's how to find which sector ETFs to day trade and what to watch for.
  5. Forex Fundamentals

    These Are The Best Hours To Trade the U.S. Dollar

    The best times to trade USD currency pairs are centered before and after economic releases in in the U.S. and cross-venues.
  6. Trading Strategies

    Picking The Right Algorithmic Trading Software

    Willing to enter the tech-savvy world of algorithmic trading? Here are some tips to picking the right software.
  7. Trading Strategies

    Marijuana Penny Stocks: Where Risk Meets Sin

    Marijuana producers and users, working in a market that's still illegal in many states, are a risky but promising bet for investors.
  8. Investing Basics

    Explaining Foreign Exchange Risk

    Foreign exchange risk is the chance that an investment’s value will decrease due to changes in currency exchange rates.
  9. Forex Strategies

    Two Great Currencies To Profit From Oil Volatility

    U.S. dollar crosses with Canadian and Australian dollars offer easy access to crude oil trends due to their tight correlation with energy futures.
  10. Investing

    Redefining the Stop-Loss

    Using Stop-losses for trading doesn’t mean ‘losing money’, but instead think about the money you'll start saving once you learn how they work.

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!