How to become a forex trader

1. 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 slippage or wide bid-ask spreads
• Lower volatility: these pairs tend to be more predictable and 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. There may be lower liquidity in these markets, but they can still be highly volatile. 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 9am and 1am Swiss 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 if you’re not careful. Always take steps to mitigate this risk by using our range of tools.

2. 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.

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 analysed 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.

3. 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.

With us, you can use two different automated trading platforms: MetaTrader 4 and ProRealTime. These are third-party platforms that are integrated with our own.

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

4. How to start trading forex

1. Open a live account or practise on a demo account
2. Pick the currency pair you want to trade
3. Choose how to trade forex – on the spot or using options
4. Set your position size and manage your risk
5. Place your trade

It’s important to note that, if you want to become a successful forex trader, you’ll need passion and – more importantly – discipline. Every decision you make must be considered with the utmost care. Plus, you shouldn’t trade with a large amount of funds that you can’t afford to lose until you become more confident in your skills and strategy.

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 CHF 20,000 in virtual funds.

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. To open the position, a margin deposit is required, which allows for larger profits and losses compared to the deposit amount.

With CFD trading, you’re speculating on currency values without owning the physical assets.

Trading forex on the spot or using options

You can choose to trade forex in the following ways: on the spot or using options.

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.

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