Forex trading is a highly volatile and speculative financial market that happens 24 hours a day, seven days a week.
Forex trading is extremely popular because it provides you with a consistent and reliable source of profit. However, it’s also riddled with risk if you aren’t careful.
In this post, you’ll learn just how hard it is to become a successful trader and how to avoid common mistakes that can ruin your trading.
What is Forex Trading?
Forex trading is when a trader buys a currency and sells a different one, and the exchange range fluctuates according to the demand and supply. The trade for currencies takes place in the foreign exchange market that is open from Monday to Friday.
The Foreign exchange market is open 24 hours a day. All currencies are traded over the counter (OTC), which means there are no physical exchanges, and a worldwide network of financial institutions and banks oversee the operations. As a result, the vast majority of trading in the market is between institutional traders.
Different Ways of Trading Forex
There are three ways to trade Forex:
- Spot Market: This is the primary market for trading forex; here, pairings of currencies are swapped, and the exchange rate is determined based on demand and supply.
- Forward Market: Instead of initiating a trade, traders can have a binding contract with another trader in the forward market. The two parties will also decide the exchange rate, amount of currency, and a future date.
- Futures Market: Like the forward market, traders can opt for a contract to sell or buy a fixed amount of the currency at a specific exchange rate in the futures market.
How hard is Forex Trading?
Most traders involved in Forex trading are all about selling and buying; however, this strategy will only give you 50 % of the success. This perception that most Forex traders have is wrong and becomes a major obstacle for them in the long run. Below we have discussed a few reasons for Forex trading being so difficult:
- Insufficient Education
Education is necessary to succeed in business; however, the degree doesn’t matter on most occasions. You can have a Ph.D., Masters, or Bachelor’s degree, but it guarantees little success at Forex. Forex traders gain education with experience, and that is what matters the most in the long run.
Traders need to maintain a journal, note down all the necessary details, keep an eye on the news, study the market conditions, and develop sustainable strategies.
- Risk and Overtrading
The simplest rule of Forex trading is only to risk 1% per trade. However, most traders risk 10% to 50% per trade. Below is a table that shows loss per %:
| LOSS OD TRADING CAPITAL | GAIN TO RECOVER LOSS |
| 10% | 11% |
| 20% | 25% |
| 30% | 42% |
| 40% | 66% |
| 50% | 100% |
| 60% | 150% |
| 90% | 900% |
Every 10% drawdown can lead to situations from which most traders will never recover.
- Acceptance of Randomness
No trader in the world is willing to sacrifice control; however, no one in particular controls the market. Forex traders cannot decide fluctuations in the price of currency pairings, so traders sometimes have to accept randomness and visualize everything. Even the trades that are predictable can fail, so be prepared.
- Traders Don’t Have a Boss.
Most people who do desk jobs have some form of authority that they work under, and some rules and regulations need to be followed. Unfortunately, the Forex market lacks a major authority, so traders sometimes make poor decisions and lose a lot of money in the process.
Unless you work for a firm that trades at Forex, you are pretty much on your own, and that is a risky situation to be in.
- Patience is Everything
The greatest quality a trader can have is patience, however, very few traders have patience. In the beginning, traders that are patient eventually gain more success than traders that are aggressive.
What is a Forex Trading Broker?
A Forex broker is an intermediary between the interbank system and the trader. The interbank system is a network of banks that trade with each other. Typically, a broker at Forex will offer the clients prices of banks that have access to forex liquidity and lines of credit.
Most forex brokers will offer prices of several banks and will help clients find the best prices.
Opening a Forex Trading Account
The process of opening a Forex trading account and a bank account are quite similar, as both require identity verification and paperwork. The entire process usually lasts a few days.
However, brokers also offer demo accounts to their clients, which require minimal paperwork. The demo account will help traders practice trading and prepare them for the tough journey ahead.
Broker’s Reputation
Forex brokers are there to help clients connect with banks that are selling and buying currencies. There are a set of rules and regulations that all brokers need to adhere to. Although the rules and regulations of Forex marketing are strict, traders can still bump into inexperienced brokers and lack information.
The National Forex Association (NFA) follows all the brokers at Forex and can also identify their reputation. Before choosing a broker, traders must first ensure that a US authority regulates them. Brokers that are regulated provide information on their websites.
How is Forex Traded?
Below we have discussed some important steps that need to be taken before you trade for the first time:
- Select a Currency Pairing
When doing Forex trading, traders exchange currencies, which means they will buy one currency and sell another one. Due to this, traders will always trade currency in pairings. On the other hand, new traders will start by buying and selling the most commonly traded currencies.
- Analyzing the Market
For a trader having a proper market, information is the most valuable tool, and if your research skills are not up to the mark, there will be hurdles for you in the future. When traders first start researching, they get several resources from Forex, and traders are supposed to research a specific currency pair.
Traders need to study charts, analyze the data, and keep in touch with economic indicators to understand the market’s conditions better.
- Pick your Position
If you have experience trading bonds, stocks, or other financial products, you should be well aware of the market’s direction. However, Forex trading is different because you are buying one currency and at the same time selling another one, and you can speculate the movements of the market.
Buying Position: When in a buying position, a trader believes that the value of the base currency will rise compared to the quote currency. If you are buying EUR/USD currency pairing, you expect the price of EUR to strengthen against USD. This also means that EUR is bullish and USD is bearish.
Selling Position: When in a selling position, a trader believes that the base currency will fall compared to the quote currency. For example, if the trader is selling EUR/USD, the price of EUR will weaken against USD, so in this case, the EUR is bullish, whereas the USD is bullish.