So you want to become a forex trader. Or maybe you just want to learn what foreign exchange (also known as forex or fx) trading is all about. You’re in the right place. Follow the guide below, and by the time you reach the end, you’ll be a forex trader. Depending on your own situation, you can complete the guide in a matter of weeks, or even days.
But that’s just the beginning of your journey. Once you have the basics down, check out the guide to Trading Profitably. There, we’ll concentrate on the research and trading tools available here at CapitalistTrader.com that can help you on your road to success.
Let’s get started with a little reality check. Read through this post on living the forex trading dream, and then come back here. Don’t worry, I’ll wait…
Now let’s move on. Throughout this guide, I’ll provide links to some valuable outside resources. There are plenty of great sites out there that provide basic information about the forex markets, so there’s no reason for me to re-invent the wheel here. What I bring to the table is mainly the unique research and trading tools that we’ll be discussing in the Trading Profitably section of the site.
So when I send you off to look through another site, don’t go too far down the rabbit hole and get lost. Remember to come back here for the next step in the guide. Here are the 5 steps you’ll go through on your path to becoming a currency trader:
First things first. You need to know the basics. What’s a currency pair? What’s a “pip?” What’s the forex market all about? Is it for me? How do people make money at this? What do I need to get started?
Over the years, one of the best forex educational sites I’ve run across is babypips.com’s “School of Pipsology,” so that’s where I’m going to send you in a moment. Even if you’re familiar with the forex market and have traded before, I’d still recommend going through the babypips material as a review.
This step will probably take you several days, and perhaps even a week or two, depending on your own schedule. The babypips course has 11 levels, and each level has several topics (there are about 30 or so topics just in the first “preschool” level). There are also a few quizzes for each level. I’d recommend doing only one or two levels a day so you don’t get overwhelmed and burn out. There’s a lot of information there.
Another piece of advice before I send you off to the School of Pipsology. Levels 3 through 8 are concerned with various analysis techniques that traders use to predict future price direction. Most of this involves technical analyisis, which is the interpretation of price chart patterns and indicators. Take this stuff with a very big grain of salt!
These techniques make it look easy to predict market direction, but it’s not. If it were so easy, most traders would be millionaires. And they’re not. In step #3 of this guide, I’ll have you try a few of these strategies in a practice account. At that point, I think you’ll begin to see the real challenges that traders face.
So I would suggest skimming through levels 3-8 of the School of Pipsology for now, and come back to those subjects later. Concentrate on levels 1-2 and 9-11.
But enough warnings. It’s time to go off to school. Spend a week or so going through the School of Pipsology. When you’re done, you’ll at least be familiar with the basics. At that point, come on back here and we’ll move on to step 2!
How was the School of Pipsology? Fun and informative? Ok, but now you probably want to get some hands-on experience, right? I know I did at this point. So let’s move on to the second step on your road to becoming a forex trader. It’s time to get a forex broker.
There are dozens and dozens of forex brokers out there, so at first glance it seems like a daunting task to explore them all and find the best one for you. However, it’s really not that hard. First of all, you can find plenty of forex broker review sites on the web by just searching for terms like “Best forex brokers” or “Top forex brokers.” We’ll look at one of these in a few moments. Secondly, after visiting a few of these review sites, you’ll notice that only a few forex brokers keep showing up near the top of most lists. These are the most popular and most reputable names in the business. Third, I’ve used a few of these brokers, and I’ll share some of my own experiences below. Finally, remember that you’re not locked into your first choice. You can even have accounts with more than a single broker at once if you want.
In the second level, or “Kindergarten” phase of the School of Pipsology, you learned about different types of brokers and what to consider when choosing one. You may want to take a few minutes to review that section now.
Next, let’s look at an example of a broker comparison. In this post on nerdwallet by Arielle O’Shea, she compares four forex brokers based on factors like cost, platform, and ease of use.
Here’s my own experience with brokers.
FXCM: In 2004, I opened an account with FXCM and managed to blow up a small account. I never had a problem with FXCM, but they didn’t have very flexible trade sizes. I eventually closed this account because I needed the money. My understanding now is that FXCM no longer offers forex trading in the United States. If you’re in another country however, you may want to check them out.
Ameritrade: I also opened an account with Ameritrade in 2004, but that was for the purpose of using some stock trading strategies that weren’t allowed in my Fidelity account. I’ve never used the Ameritrade account for forex trading, so I can’t tell you much about this. I still have the account though, so maybe I’ll try it out and report back at some point.
Oanda: A year or two after I closed out my FXCM account, I opened one with Oanda. I really like their trading platform and they allow extremely flexible trade sizes. They also calculate carry interest right to the current second, which is pretty cool and convenient. I did have one major problem with Oanda once when I tried to make a deposit from a debit card. The money came out of my Fidelity account, but never appeared in my Oanda account. Oanda’s customer service was useless in solving this, and Fidelity’s lawyers had to get my money back from Oanda. I haven’t had any deposit or withdrawal issues since then though.
So now, between my own experience and the nerdwallet review, we’ve mentioned five brokers. So here’s your task. Over the next day or two, visit and explore at least two or three of the brokers on the list below (or others of your own choosing if you’ve been exploring broker review sites). At each site, open a demo account and spend a few hours trading forex with no risk (it’s all make-believe money). Don’t worry at this point about your trading profits and losses. Your goal is to just “test drive” these trading platforms to see which ones are easy to use, which are user friendly and intuitive, and which ones are annoying and just drive you crazy.
Here’s the list brokers we’ve mentioned here:
When you’re finished exploring several of them, come back here and we’ll continue.
At this point, you’ve gotten some hands-on trading experience with several brokers. This is no longer all theory. Now you know what it’s like to sit down, open up your trading platform, and actually place forex trades. And you’ve also got a pretty good idea of what you like and what you don’t like about each broker.
So make a choice.
Remember, this isn’t a marriage. You’re not making a life-long commitment. You can always change to another broker later if you want to. But for now, you need to move forward on your path to becoming a trader. And that means you need to open up an actual trading account. So choose a broker, go through their registration process, and make the minimum required deposit. Did you get that minimum part? Do NOT put a lot of money in this account at this point. Just deposit a small amount that you can afford to lose. Why? Because you’ll be using this money during your learning process, and you’ll be making mistakes with it at first.
Did you do it? Is your account open and funded? Congratulations! You’re now officially commited to becoming a trader. Let’s move on to the next step.
Now that you’ve chosen a broker and funded your account, you have two goals. The first is to get very familiar with your trading platform, and the second is to get some real (but low risk) experience with trying to make a profit.
Your broker should have a demo trading option that allows you to use the platform to trade with “fake” money. The demo platform should, however, be giving you the actual price feeds from the real world market. While the money isn’t real, the currency price movements are. You should start with demo trading first; don’t touch your real money yet!
Spend a few hours just placing demo trades on the platform. Don’t worry about strategy, analysis, or even whether you’re making a profit or loss at this point. The idea right now is to learn:
- the mechanics of the trading platform
- the effects of price movements on your positions
- the effects of price movements on your open orders
- the effects of price movements on your account balances
- the effects of leverage on your account balances
During this process, make your trades very short term, with the profits and losses amounting to only a few pips. I’m not suggesting that this kind of short term scalping is a good way to trade; this is just a quick way to get used to your trading platform and the mechanics of trading. You want to get to the point where you can place orders quickly and confidently without fumbling around, and where you understand the ramifications of the orders that you’re placing.
Make sure you can do all of the following:
- place market orders that fill immediately
- place orders that only fill when prices reach a certain level (different brokers may have different terminology for these)
- include stop loss orders and take-profit orders on your entries
- know how your account balances will be affected when price moves in either direction
- know how to check for open positions
- know how to close an open position
- know how to check for open orders
- know how to close an open order
Once you get comfortable with your trading platform and with how different types of orders work, it’s time to think about making some money. Remember those strategies you read about in the School of Pipsology? Right, the ones in levels 3-8 that I told you to skim over and take with a big grain of salt? Ok, go back and look through those again. Pick some strategies that appeal to you; the ones that seem to make the most sense. Now go onto your trading platform (still in demo mode please!) and try out a few of these strategies. See if you can make some money.
This can get addicting. You may find yourself spending several days (and maybe some sleepless nights) trying out different strategies, tweaking them a bit, trying various combinations of indicators, and so forth. Some of your efforts will have promising results, and you may have visions of dollar signs (or yen signs or British pound signs) dancing in your head as your account balance rises. Other things you try may turn out to be dismal failures, causing your account to crater. Go wild here! Try new things, and make plenty of mistakes. It’s not real money (yet) and this is where you’re really learning what is to be a trader.
So how are you doing? Did you find some strategies that work? If you haven’t managed to consistently make money in your demo trading yet, don’t despair. In my other guide, Trading Profitably, I’ll introduce you to some of my own research and trading tools that may be able to help. If you have managed to make some money demo trading, congratulations! You’re ahead of the game at this point.
Either way, it’s time to stop using play money and get real (but not too real). Remember when I had you open your first forex account, and I told you to just deposit the minimum; a small amount that you could afford to lose? Hopefully you did that, because you’re about to graduate from the demo phase to trading your actual hard earned cash.
The point of this phase in your development as a trader is to discover that trading isn’t only about the mechanics of the market and learning a few strategies. It’s about you. It’s about trading psychology, and how your emotions can affect your performance. (Note that I’m talking about trading psychology here as opposed to market psychology. The latter is the study of how emotions like fear and greed, when manifested by large collections of market participants, tend to move prices in certain ways).
Trading in a demo account is all well and good when you’re trying to learn the basics of trading, and when you’re testing out an analyis technique or a new strategy. But because it’s not real money, you may find that you’re not emotionally invested in what you’re doing. You’re not getting the full experience of what it is to be a trader. You’re not experiencing the thrill of seeing your account value rise and thinking about what you could do with all that new money. You’re not experiencing the anxiety (and occasional panic) that occurs when a position has turned against you, causing your account value to shrink right before your eyes.
Trading with real money reveals how you’ll deal with this emotional roller-coaster we call trading. Will you have the steely discipline to cut losses short and let your profits run as the common wisdom tells you to do? Or will you grab every tiny profit that comes along before it gets away, leaving hundreds of pips on the table? Will you let a losing position drain your account while you curl into a ball on the floor hoping that it somehow turns around at some point? Will you accept your occasional trading losses as the inevitable cost of doing business, or will you angrily enter a huge position in an irrational attempt to get revenge on the market for taking your money?
The subject of trading psychology is vast, so here’s my suggestion. Try trading your account with real money for a few days, just as you’ve been doing with your demo account. Notice how you react to various situations of profit, loss, and uncertainty. Keep notes in a journal (a common practice of successful traders, by the way). After you’ve gotten some experience, do an internet search for terms like “trading psychology.” Spend some time exploring this key subject. See if you recognize yourself and your own reactions in some of the discussions you find.
Ok! Take a break. How’s your trading going? Did you make money? Did you lose money? Did you lose your mind? Is it harder than you thought at first? Is it more challenging? More fun? More stressful? More of all of these things?
Need a friend? You could probably use someone to talk to about your trading experiences at this point. Maybe just someone to give you some advice. Maybe just a friend or two who know what it is to live the trading life. Let’s move on to the next step…
Unfortunately, even if if I were some kind of trading guru (which I’m not), there’s no way I could answer questions and offer advice to everyone who visits the site. All I can offer here are the little tidbits of knowledge in my blog posts, along with my research and trading tools. Also, as I note at the bottom of each of my blog posts, you can visit my Forex Factory thread and join the discussion (if any) there. I check in several times a week to see what’s up.
But enough about me. The good news is that there are literally hundreds of traders out there who are willing to help you. A quick internet search for terms like “forex trading forums” will lead you to dozens of online trading communities.
Before visiting any of these forums, make an effort to know the terms of service, what’s acceptable, what’s not, etc. Also, beware of the scammers who will regale you with stories of the riches you’ll make if you only buy their trading system or whatever. While many educational products are legitimate, take everything with a grain of salt, especially if someone’s making outrageous claims about how profitable they are. Basically, try not to get into fights, play nice, and you’ll soon find that you’re part of a thriving online community that can serve as a valuable resource in your new career as a trader.
And if you’ve followed this guide to this point, then that’s what you are; a trader. So go forth and meet your bretheren!
Now you’ve learned a lot about trading in general and the forex market in particular. You’ve researched brokers, picked one, and opened an actual trading account. You’ve learned to use your chosen trading platform. You’ve got some experience trading, both in demo and with real funds. Finally, you’ve cultivated a support network by exploring the various online forums and meeting some successful (and maybe not so successful) traders.
Well…that’s a good start.
But know this. A trader’s education never ends. There’s always more to learn and discover about how the market works, analysis techniques, trading strategies, market psychology, trading psychology, money management, risk management, trade management, trading math, new technologies, and a host of other topics.
All of this, of course, has one purpose; to make money. I’m a laissez-faire capitalist. To me, profit is not a dirty word.
So I invite you now to look through my other free guide, Trading Profitably.
See you there, and as always…keep pipping up!