What does a forex trader do? What is forex trading?

Forex trading is a way of trading one currency for another. The main aim of forex trading is to successfully predict currency values. These values rise or fall according to supply and demand. If demand is high for one currency, then it’ll rise against the other.

If demand is low for that currency, on the other hand, it’ll dip against the other. In forex trading, each currency has its code. For example, the code for the US dollar is USD. Without knowing this and other market terms, forex trading is a shot in the dark. Here are some key words and phrases you need to grasp:

CURRENCY PAIR

A currency pair defines two currencies. In the forex market, currencies trade in pairs rather than separately. Whenever you buy one currency, you are selling the other one. The forex market has three pair types; majors, minors, and exotics. Major pairs have USD in them.

These include; EUR/USD, GBP/USD, USD/JPY, AUD/USD, NZD/USD, USD/CHF, and USD/CAD. Minor pairs don’t have USD.

These are; EUR/GBP, EUR/AUD, GBP/JPY, EUR/JPY, EUR/CHF, EUR/CAD, and others. Exotic pairs combine a major currency with the currency of a developing nation. For example; USD/MXN, USD/SEK, among others.

BASE/QUOTE CURRENCY

The price you see on the left side of a pair is the base currency. The price you see on the right side of a pair is the quote currency. For example, let’s take a look at this currency pair – GBP/USD = 1.40 Here, the base currency is GBP. The quote currency is USD. This means that £1 is worth 1.40 dollars if you want to buy.

BID/ASK PRICE

The bid price is the price when you’re selling a currency pair. The ask price is the price when you buy a currency pair. The difference between bid and ask prices is the spread.

GOING LONG/SHORT

Going long means you are buying a pair. Going short means you are selling a pair.

PIP

This is the acronym for ‘percentage in point.’ It represents the smallest movement of a pair in decimal units. Usually, a currency price is shown with four decimal places. For instance, EUR/USD is shown as 1.1600. JPY pairs are the only exception. They are quoted with two decimal places. For example, USD/JPY is quoted as 114.00.

LOT SIZE

A lot is the size of your trade. It equals the number of units of a base currency. It comes in three forms; micro, mini, and standard. The micro lot equals 1,000 units and has a pip value of $0.10. The mini lot equals 10,000 units and has a pip value of $1.

The standard lot equals 100,000 units and has a pip value of $10. Suppose you are trading one standard lot. Every pip movement in your favor will bag you $10. If the total movement is 100 pips, then you get $1,000.

BULLISH/BEARISH

When the price is going up, it’s a bullish move. When the price is going down, it’s a bearish move.

How does forex trading work?

Currencies are traded online through a forex broker and the market is open 24/5. Although I did define bid and ask prices earlier, I’m gonna define them again. When you buy a currency pair, the price you pay is called the ‘ask.’

When you sell, the price is called the ‘bid.’ And the difference between these prices is the spread. It generally appears at the bottom of the price quote. These terms are a bit confusing at first but you have to remember them.

What is leverage in forex trading?

The concept of leverage is important in forex. Leverage is like a loan that you can get from your broker. This can increase your purchasing power. And you can trade with a large amount of money. It is quoted as a ratio. For example, 1:10, 1:100, and 1:200.

To get leverage, you have to put down a small deposit, called a margin. Leverage is a two-edged sword, however; increasing your losses as well as your gains. It can make or break your trading strategy. So, it’s important to use it carefully.

If you are a beginner, I would recommend using no more than 1:50. Read our article about leverage trading to learn more.

Forex traders buy and sell currency pairs. They speculate on the movement of those pairs. They go long or short. But first, they need a strategy. Either a fundamental strategy, a technical strategy, or a combo of both.

The strategy is the key ingredient. It separates pros from amateurs. Based on that strategy, a forex trader enters and then exits a trade. The trader’s first step toward a fundamental strategy is to understand the market. Understanding the market means what the main drivers are.

Currencies have national governments behind them. So, a country’s policies or economic situation can affect its currency. Economic, political, and geographical factors are all in play. These are the fundamental drivers of the forex market. We can’t control fundamental factors, though.

We can only devise a strategy by keeping up with the news. A technical strategy involves technical analysis of a currency. This in turn involves examining price charts, and the indicators and patterns of price movements that they reveal. With the help of charts, you can create a strategy and trade pairs without breaking a sweat.

With your strategy in place, your next step as a trader is to choose your trading style. This depends on how you want to trade the market. Forex traders have different styles depending on the time frame they trade. Longer time frames are daily, weekly, and monthly.

While shorter time frames last from a minute to 4 hours. In a longer time frame, you make fewer trades and they require minimal attention from you. In shorter time frames, you make more trades and monitor your screen constantly. Let’s break down trading styles for you:

• A scalper trader frequently makes multiple trades in a day.
• A day trader makes one or several trades in a day.
• A swing trader captures market lows and highs and trades on longer time frames.
• Finally, a position trader applies a long-term strategy that can last for months and years.

To become a forex trader, you have to choose between these styles. You don’t want to focus on the markets all day for five days? Then stay away from scalping and choose to trade long term. Don’t want to wait a few days or months to potentially make a profit?

Then focus on day trading or scalping instead. As we said, the forex market is open 24/5.  That’s a big plus for forex traders. They can enter the market any time they want.

1. Pro forex traders are action takers

Learn the market and its secrets. Particularly when to enter it yourself At the end of the day, if you cannot take action, then forex isn’t for you.

2. Pro traders risk what they can afford to lose

It’s not a good thing to risk a gazillion dollars if you can’t afford to lose it. You can’t risk your bills money on trading. Pro traders are smart, and they compound their profits. Rather than burning through all their funds, they grow those funds, day in and day out.

3. Pro traders know they are in a risky business

Forex is not all about profits. Minimizing your losses is the flip side. In fact, 95 percent of beginners lose when they start trading. Pro traders know that losses are part of forex trading. So they make sure they can only lose so much, accept their losses, and move on.

4. Pro traders are always curious

Learning is the stepping stone of forex trading. Pro traders tend to read blogs and books and gather as much info as they can. When I first met my mentor, he said, “Learn, learn, and learn.” Learning takes confusion out of the equation.

It also helps you develop a trading strategy. Get the right education, and you’re halfway there. The rest you learn by doing real trading. Check out another article that discusses the top 10 facts about forex to get better acquainted with trading.

Forex traders typically wake up early. After breakfast, they check their open positions, if they have any. After that, they will check the news, forex rates, charts, or currency heat maps. Doing actual trading depends on the trader’s style.

If someone is a scalper, he/she will remain glued to the screen most of the time. If a trader is a position trader, then they will check their positions once or twice.

The bulk of a forex trader’s time is spent doing analysis. This dictates how and when they will next trade. And helps them in developing a trading strategy.

Pros

Forex is a huge global market, which means plenty of opportunities. It is the most liquid market in the world. You don’t need much money to enter the market. Forex runs 24/5.

Cons

Currencies constantly fluctuate and have high volatility. Using excessive leverage can wipe out your account. Currency exchange rates rely on certain factors for their fluctuations.

Final thoughts

I’m sure by now you will have an idea of forex trading. If you want to become a forex trader, you need to follow certain rules. Remember, anyone can become a forex trader.

But not everyone can become a pro trader. If you want to learn more interesting things, read the article on how MBA Forex blamed CBN.