How to become a forex trader
Forex remains one of the most popular markets around the world. Explore our introduction to forex trading.
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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. Here’s why:
- High trading volume: this means there are many buyers and sellers in the market and orders are executed fairly quickly and at competitive prices
- High liquidity: traders can enter and exit positions easily, without having to worry about wide bid-ask spreads
- Lower volatility: these pairs tend to be less prone to sudden spikes in volatility, which can be beneficial for novices
- Tight spreads: a tight spread is generally considered to be more favourable for traders because it means that they’ll have to pay less to enter or exit a trade
Minor and exotic pairs can be popular, especially for those interested in emerging markets. However, there may be lower liquidity and higher volatility in these markets. Some of the common pairs include USD/ZAR, SGB/JPY, USD/SGD and CAD/CHF.
Generally speaking, the best time to trade forex is typically when the LSE and NYSE sessions overlap (between 8am and 12pm UK time), as this is when the forex market is most liquid. During the overlap, there’s also increased volatility, which increases opportunities to take a position.
Remember, that increased volatility also carries a significant amount of risk. In other words, you could make a loss quite quickly and you should consider taking steps to mitigate this risk by using our range of tools.
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 also shifts due to 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, exchange regime settings – which manage the value of its currency against others; and currency interventions – actions taken to influence the value of the currency.
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 a 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’.
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 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 analysed and used to make predictions about the future movement of currency prices.
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 platforms.
What is algorithmic trading?
Algorithmic trading, also known as algo trading or automated trading, is the use of computer programs and algorithms to execute trades in the financial markets. These algorithms are designed to analyse 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 platforms and brokers. It allows for faster and more accurate trades and can also analyse and process large amounts of data in real-time.
Benefits and risks of algorithmic trading
- Trades being executed at the best price
Algo trading algorithms are designed to analyse market data in real-time, and they can identify the best prices to buy or sell a security. This can lead to better trading execution and improved returns
- 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
You run the risk of compound losses due to the higher number of simultaneous trades and the speed at which they’re executed
How to start trading forex
- Open a live CFD account or practise on a demo account
- Pick the currency pair you want to trade
- Choose how to trade forex – on the spot, or using futures or options
- Set your position size and manage your risk
- Place your trade
It’s important to note that, like any other market, trading forex is risky – because you’ll be trading on leverage. While this magnifies your exposure by means of margin, it also amplifies your losses. This is why risk management is so important.
To help you grow your confidence, we offer a demo account with $20,000 in virtual funds which you can use to familiarise yourself with the markets offered and the IG trading platform.
Trading forex using CFDs
When trading forex CFDs, you’re agreeing to exchange the difference in the price of a currency pair from the time you open the position until you close it. This is done on leverage, meaning that you gain the full exposure to a position while putting down a fraction of the value of your trade as margin.
Although you’re only paying a small percentage of the full trade’s value upfront, your total profit or loss will be calculated on the full position size, not your margin amount. This means that profits and losses are magnified.
With CFD trading, you’re taking a position on currency values without owning the physical assets. Remember, CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Trading forex on the spot, or using options or futures
Spot forex is the immediate purchase or sale of a currency pair at the current market price. Traders with a short-term outlook often trade on the spot. Forex options give the holder the right but not the obligation to buy or sell a currency pair at a specific price on a specific date. Forex futures are similar to options, but the trader must exercise their right to trade. Traders with a longer-term view often choose options or futures.
Note that there are funding charges when keeping spot trades open overnight, but not when trading futures. However, futures have larger spreads.
Remember, all trading incurs risk – and this risk is multiplied when trading on leverage. 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 forex using CFDs – and you can also choose to trade on the spot or via options or futures
This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.