How to Start Forex Trading
Forex trading is not easy. The forex market is complex and finding sustainable success as a forex trader can be extremely difficult. Year after year, the majority of forex traders lose money. Any information you see to the contrary should be treated with suspicion (see my educational series about avoiding forex scams).
The majority of forex traders lose money.
Forex traders lose money for a variety of reasons, and every forex trader’s experience is different. In my experience (I’ve been in the forex industry for over 20 years), most forex traders lose money simply because they lack the discipline required to develop and follow a rules-based trading strategy that incorporates risk management.
The key to long-term success is to keep your average profits greater than the sum of your average losses. Easier said than done.
“Let your profits run…”
Many forex traders jump at the chance to capture small profits out of fear of losing any unrealized gains. On the opposite end, they’ll delay exiting a trade when they experience unrealized losses, hoping that the loss will fail to materialize if they wait long enough. This is a formula for losing money over time as a forex trader.
How to get started as a forex trader
Trading forex is complicated, and the odds are stacked against you from the outset. That said, there are ways to prepare yourself for entering the forex market to give yourself the best shot at success. Here are my top takeaways for how to get started as a forex trader:
1. Educate yourself.
New forex traders should consume as much information as possible. Read articles, watch videos, and take educational courses. Learn about the many risks that come with trading forex and CFDs, and how you can navigate them.
Pro tip: I highly recommend starting a dedicated trading journal. Jot down new terms, forex lingo, and trader jargon as you go along. I'm a big fan of investor.com's guide to the best online trading journals; it's a great resource for getting a head-start on your journaling.
Be persistent. Forex trading is complicated; acquiring a deep understanding of the forex market takes time. Be patient and persistent in your quest for knowledge.
Keep an open mind. Just because you’ve mastered one broker’s trading platform and terminology doesn’t mean you’ll be fluent with other kinds of trading software. Terminology and lingo can vary from broker to broker.
Forex trading is risky
Forex trading may not be suitable for everyone. Given the nature of leveraged trading on margin, only a small amount of risk capital should be invested even if you have determined that trading is suitable for your individual financial situation.
2. Study the markets.
Today, financial markets are highly interconnected and information moves at an astonishing pace thanks to electronic trading and the rapid dissemination of market data across trading platforms.
It can be overwhelming for beginner forex traders to stay up to speed on the conditions of different asset prices and trends. I highly recommend reading news headlines, examining analysis reports, and watching market research videos with technical and fundamental analysis. These tools will help you when you begin to look for investment opportunities.
Charts are a powerful tool for forex traders who conduct analysis as part of their trading strategy; many brokers offer powerful charting, and there are many third-party providers, like TradingView, that specialize in advanced charting and analysis tools.
3. Develop a trading strategy.
Developing a trading strategy is arguably the most important – and most difficult – aspect of forex trading. For some traders, strategies are simple and lack technical detail, whereas others spend weeks (or even months) refining their approach and outlining their methodology in great detail.
Just because a trading strategy is simple or rudimentary doesn’t mean it's bad, just as sophisticated strategies aren’t guaranteed to be successful.
The more precision you can bake into your trading strategy, the less you’ll have to think about on a day-to-day, trade-by-trade basis. You won’t have to make as many mental calculations when actively trading if you’ve done the work ahead of time.
For example, if a trader’s strategy is vague or has loosely defined parameters, they’ll need to spend more time worrying about how large their trade sizes should be, what their stop-loss or take-profit should be, or whether they should be entering the market with more than one trade.
Good trading strategies define a number of factors that govern the decision-making process and outline the strategy’s goals in advance. Here is an example of questions to ask when trying to put together a trading plan:
- Motivation. What are your specific goals as a forex trader?
- Risk Capital. What is your trading budget for risk capital?
- Initial investment. How much of your budget are you going to use to trade forex?
- Lifestyle considerations. How does forex trading fit into your schedule and lifestyle?
- Schedule: How much time can (or, will) you dedicate to trading each day? Each week? Each month?
- Trade (position) size. What is the ideal trade size relative to your cash balance?
- Trade value. What is the value of a pip for the trade size you are considering?
- Margin level. What is the ideal leverage ratio or margin requirement for your account?
- Time horizon. What is the ideal time frame for your trade duration?
- Risk/reward ratio. What is your ideal maximum target and loss per trade?
Identifying trade entries and exits.
- Deciding on entries. How will you determine when to enter the market with a long or short position (buy or sell to open a new trade)?
- Deciding on exits. How will you determine when to exit the market, to close an existing trade position, if your stop-loss or take-profit levels aren’t reached within a pre-defined timeframe?
- Maximum average stop-loss and take-profit. What is your potential risk limit in dollars (or other base currency) across all open positions?
- Maximum average take-profit. What is your potential reward in dollars (or other base currency) across all open trades with a take-profit order attached?
- Simultaneous trades. What factors dictate whether you will open more than one position at a time? What is your limit for simultaneous trades?
There is no one magic answer for each of the above questions. Your own answers will depend on your identity as an investor and your unique financial circumstances, as well as your specific goals, preferences, and objectives.
In my experience, keeping a trading journal is a fantastic way to keep track of your goals and improve as a trader. Record your results and reflect on any lessons learned. Refining a trading plan is a life-long endeavor, even for the most successful investors.
Open an account with a forex broker
Once you’ve consumed forex educational content, studied the markets, and developed a detailed trading plan, it’s time to open an account with a highly rated, well-regulated forex broker. I always recommend choosing a broker that is licensed in multiple reputable jurisdictions.
Looking for a forex broker?
Check out my guide to the best forex brokers in the industry to find highly rated, well-regulated forex brokers.
Once you’ve chosen a forex broker, you’ll want to familiarize yourself with the broker’s terms and conditions. These are not uniform across the industry, and they will govern the terms of your agreement for your live trading account (it’s always important to read the fine print).
After you’ve experimented with the broker’s trading platforms using a paper trading/demo account (see more on that below), you can open that live account and start trading with real money. Examine your broker’s funding options and deposit a small amount of risk capital that you plan on begin trading with.
Paper trading. Paper trading accounts (also commonly known as demo accounts) allow traders to practice forex trading without risking any real funds. Paper trading is a great way for beginners to get a feel for the basics of forex trading and to test out their broker’s trading platform.
A note on paper trading:
I do not recommend using a paper or demo trading account to judge one’s own trading skills or test new trading strategies. The psychology of trading is complicated, and traders may approach risk and reward differently when there is no real money at stake.
Is forex trading legal?
Yes, forex trading is legal across a wide range of reputable international jurisdictions. Many of the world’s prominent financial centers regulate forex trading and allow retail forex trading. That said, the legality of forex trading can vary from country to country. Some countries, like Pakistan and Malaysia, may offer physical currency exchange, but options for retail spot forex trading are limited.
Finding a broker in your country
Residents of countries that don’t have an official regulatory framework for local brokers that offer retail forex from a margin will need to seek out international forex broker alternatives. Check out our international forex country guides to find a reliable forex broker in your home country.
Are forex markets regulated?
Yes, but not every regulatory jurisdiction offers the same protections for forex traders. The forex market isn’t a single market, but a collection of decentralized marketplaces scattered across the world consisting of banks and brokers and other market participants. In the U.S., for example, forex trading is legal and regulated by the Commodity Futures Trading Commission (CFTC). Brokers that offer forex trading to U.S. residents are mandated to comply with a host of CFTC regulations and NFA member rules, and must maintain at least $20 million in regulatory capital.
On the other hand, regulatory licenses from offshore jurisdictions like the Marshall Islands or St. Vincent and the Grenadines offer little to no protections for forex traders. Check out our Trust Score page to learn more about regulation for forex brokers.
Is trading forex risky?
Yes, forex trading is risky. The two main culprits contributing to the high degree of risk in forex trading are leverage and volatility. Leverage is perhaps the number one risk factor for forex traders. Leverage allows traders to enter the forex market and open a position with just a percentage of the trade value and has the potential to amplify both profits and losses. Read my full guide to leverage to learn more.
The considerable volatility in the forex market is another significant risk factor. Markets are unpredictable, liquidity can swing up and down, and sudden news announcements can cause significant market shifts. Because forex prices are quoted in pips (hundredths of a cent), prices can change hundreds of times per minute.
What currency pairs can I trade?
There are over a hundred potential currency pairs offered by forex brokers for trading on the forex market. That said, most brokers offer just a few dozen of the most popular pairs, and most forex traders tend to focus on a small handful of commonly traded pairs. The EUR/USD, for example, is the most popular and heavily traded currency pair in the global forex market.
According to the Bank of International Settlements’ Triennial Survey (last conducted in April 2022), the U.S. dollar is on one side of at least 88% of all forex transactions. For this reason, pairs that include the U.S. dollar are among the most heavily traded, most liquid forex pairs.
What is Leverage?