If you have ever wondered what a forex trader does, read this quick blog that explains what is forex trading and the job of a forex trader.
What is being a forex trader?
A forex trader is somebody who buys and sells currencies in the global foreign exchange market. Forex traders can be full-time professional traders who earn a living trading forex or part-time investors dabbling in forex for a side-income. These days forex traders typically work in front of a screen instead of in ‘the pits’ like the picture below.
Picture from a CME trading floor
A forex (FX) trader’s job is to buy a currency low and sell high to earn a profit. In the same way that a market trader selling fruit and vegetables buys the produce at a low price and sells it at a higher price, the same is done by speculators in financial markets. The market trader takes risk by doing this because they cannot be sure to sell all their produce and cover their costs, however the risk is generally well understood and the fruit and veg is priced appropriately.
The main difference is that when global forex market trading, FX traders don’t know whether they will be able to sell the currency they have bought at a higher price and make a profit or be forced to sell it at a lower price and make a loss. The forex trader must speculate which way the currency will go next using techniques like technical analysis or fundamental analysis.
What is Forex trading?
Forex trading is the way you can trade two currencies against one another. It’s possible to profit in forex if you buy a currency that strengthens versus another currency. Currency trading is much like day trading stocks but with currencies on the forex market instead of shares on the stock market!
To understand about forex trading in more detail, read our blog What is Forex? | How to trade FX
How to become a forex trader
Most people that trade forex work for themselves. They invest in forex using their own money so that way all the risk and reward from the results of the trading is theirs.
Bank of America Trading Floor in New York
There is almost no barrier to entry to becoming a forex trader, trading stocks, trading binary options or any other type of financial market. Any individual can choose to invest in a mutual fund with their pension money or sign up with a FX brokerage to trade forex. However, the ease of starting should not be confused with the ease of trading itself, which requires specific forex education and experience to become proficient.
Getting a job in forex is typically done by applying to large international banks that have foreign exchange trading departments. You would start as a junior trader or trading assistant and work your way up. If your job is forex trading, you receive a salary plus a performance bonus. However, these are highly desirable jobs and competition is fierce.
What a forex trader actually does
Forex trading is almost entirely electronic these days so there is very little need to interact with other forex traders as was once the case, where traders spent all day agreeing trades over the phone or in person on a trading floor.
A foreign exchange trader spends his time reviewing the various factors that affect national economies and forex price charts and uses that information to determine if a currency is over-valued or under-valued relative to another currency. If the trader finds a currency that is undervalued, he/she will buy it with the hopes of selling it later at a better exchange rate. Currencies are traded in pairs, so the trader will either buy the fist currency and sell the second currency or vice versa.
All the factors put together that go into whether to make a buy or sell decision is referred to as the trading strategy. Some forex traders use price momentum to buy into trending markets, other use mathematical indicators to determine if a currency is overbought and due to fall or oversold and due to bounce.
This buying and selling is done through an online trading platform, which gives the trader access to currency markets which would otherwise only be available to banks and institutional investors. Forex platform software typically includes price data, charting and trade execution services all rolled into one.
A foreign exchange trader manages his/her account, creates reports about planned and executed trades, analyses price charts and reads the news from various countries. They will spend almost 100% of their time trading in front of a screen. If you are looking for a physically active way to earn money, forex trading might not be the right choice.
Skills needed to be a forex trader
Traders must be able to act fast to new incoming information – be it a sudden change in exchange rates or some news that could soon influence them. This requires a combination of self-confidence and “guts” to make the decision about how to act. Placing a trade is affectionately known in the financial industry as ‘pulling the trigger’.
Those who most comfortable with the high degree of risk that needs to be taken on a regular basis have the best chance of success. Managing risk requires a level head. Most people are tempted into making wrong decisions but successful traders will correct those mistakes quickly before too much damage is done to their P&L (profit / loss).
Analytical skill is also a requirement but ranks surprisingly low in making the difference between who becomes consistently profitable in trading and who doesn’t. Forex traders must be comfortable with basic math but these days the online trading platformed supplied by the forex broker will do all the calculations necessary, including trade size, currency converter, margin requirements and so forth.
A Forex trader’s daily routine
Forex traders typically wake up early to review any change in their existing positions in overnight markets. Just like trading Bitcoin and other digital currencies, trading hours for fiat currencies are 24-hours per day so a trader’s profit and loss could have changed when asleep.
After having breakfast, a trader will often check the forex rates, stock indices, precious metal and other related financial markets perhaps in heat map. They will also check the latest news headlines and review the economic calendar. This gives them a perspective for what’s happening in overall financial markets.
How much actual buying and selling a trader does throughout the day will depend on their trading strategy. Scalpers buy and sell currency all day with quick in and out trades while day traders will typically open a trade near the start of the day and close it before the end of the trading session.
The bulk of a forex trader’s time is spent doing analysis to look for new opportunities, making sure existing trade ideas are still valid and improving the trading strategy.
New traders will often get some help with their spot forex analysis through the use of a forex signal services or with a forex trading course or forex mentor.
How to practise forex trading
If you like the sound of being a forex trader, FlowBank offers a demo trading account with 1M Swiss francs or your preferred currency in pretend money to practise trading with in a risk-free environment.