Here’s a to-do list to get you started.
- Learn about forex: You now have the basic concepts, but you’ll need to understand more of the terminology and how the forex market operates. This includes learning currency pairs, market patterns, and the factors influencing currency prices.
- Develop a trading strategy:Learn the different trading strategies, such as various technical analysis strategies, fundamental analysis, and news trading. Choose a strategy that aligns with your trading style and risk tolerance. For more, see Forex Trading Strategy and Education.
- Develop a plan: Create a trading plan that includes your goals, risk tolerance, strategies, and the criteria you’ll use to assess trades. The most crucial part is not just making a plan but sticking to it in the heat of trading when emotions run high. Successful traders are disciplined traders.
- Set up a brokerage account:Select a broker regulated by a reputable financial authority, such as the Commodities Futures Trading Commission (CFTC) in the U.S. Ensure the broker offers a user-friendly trading platform, good customer support, and low fees.For ideas, see Best Forex Brokers.
- Practice with a demo account: Many forex platforms provide the ability to paper trade before you put skin in the game. This is a time to ensure you’ve locked down all the mechanics of trading and tested your strategies. It’s better to identify your mistakes and weaknesses in practice mode than when your money is on the line.
- Start slowly: Once you feel confident with your practice trading, start trading with real money. Start off small to manage risk and gradually increase your trading size as you gain experience.
- Stay on top of your holdings: Regularly check your positions and ensure you have enough funds in your account. Use stop-loss and take-profit orders to manage risk and protect your profits.
- Monitor and adapt: Keep up with market news, economic indicators, and geopolitical events likely to affect currency prices. Be prepared to adjust your strategies as market conditions change, which is not the same as adapting your strategy with every price move.
Why Forex Is Hard to Trade
Understanding the hurdles of the forex market is crucial for anyone considering trading currencies.
Market volatility and speed
Currency markets can move dramatically in seconds due to economic reports, geopolitical events, or central bank announcements. For example, when the Swiss National Bank unexpectedly removed its currency cap in 2015, the Swiss franc surged 30% against the euro in minutes, causing massive losses for many traders.4 From 2022 to 2024, the Japanese yen (JPY) fell dramatically at times against the U.S. dollar (USD), prompting Japan’s Ministry of Finance to intervene several times in the forex market to support the yen, causing significant swings.5
The lightning-fast pace of the FX markets means that even experienced traders can find themselves caught on the wrong side of a move before they can react.
Leverage amplifies losses and gains
Forex brokers typically offer high leverage—sometimes up to 50 to one or higher. While this means you control a $50,000 position with just $1,000, a small price movement against you can wipe out your entire investment. For instance, a 2% move against a position using 50-to-one leverage would result in a 100% loss.
Market complexity
Many factors are affecting currency prices simultaneously:
- Interest rates
- Economic indicators
- Political events
- Market sentiment
- Central bank policies
- Global trade flows
Understanding how these factors interact requires significant knowledge and constant monitoring of global events. A trader might correctly analyze economic data but still lose money should an unexpected political development shift market sentiment.
The speed of today’s forex market means retail traders are often reacting to price moves rather than anticipating them.
Psychological challenges
Forex trading can be emotionally taxing. Common psychological pitfalls include:
- Overtrading when trying to recover losses
- Holding losing positions too long
- Closing winning trades too early
- Making impulsive decisions based on fear or greed
The 24-hour nature of forex markets also makes it physically and mentally demanding. Unlike stock markets with defined trading hours, forex requires monitoring positions around the clock or setting precise exit points to protect against adverse moves during off-hours.
Institutional disadvantage
After getting experience and learning trading discipline, there’s a hurdle no smaller investor can surmount. Retail traders are competing against sophisticated institutional players with the following:
- The most sophisticated traded technology
- Better information access
- Lower transaction costs
- Professional research teams
- Massive trading volumes
Transaction costs
Spreads and fees, while seemingly small, do add up and can significantly affect profitability, especially for frequent traders. A trader needs to overcome these costs before making any profit.