A forex trader is a person who buys and sells foreign currencies to make money by speculating on exchange rates.
The forex market is among the most volatile and liquid in the world, and the value of different exchange rates fluctuates constantly.
Forex traders, through analysis of the foreign exchange market movements (called “technical analysis” in the jargon) try to predict future price changes so that they can profit from their predictions.
Now that you know what is a forex trader, and what they do, below you can find a series of answers to the most common doubts you may have about forex traders.
Among the topics covered in this article you will be able to find:
- The difference between brokers and traders
- How traders are categorized
- The difference between different types of traders
- How to become a forex trader
What is the difference between a forex broker and a forex trader?
The difference between a forex broker and a forex trader, is that a foreign exchange trader actively buys and sells assets in the forex market, while forex brokers are financial institutions that allow traders to carry out their speculative activity.
The word “broker” in fact refers to intermediaries, or middlemen between a market and its participants (in this case between the interbank forex market and currency traders). There are numerous forex brokers in the world, each with its own commissions, offerings, strengths and weaknesses.
Instead, when we talk about a trader, we refer to a person who is in the business of buying and selling currencies. If a foreign exchange trader want want to buy and sell currencies, they have to rely on financial institutions (forex brokers, that is), which put them in touch with central banks, other financial institutions, and other traders who are buying and selling currencies at the same time.
Forex traders categorization
Forex traders are categorized according to their experience, their available capital, and according to the type of company they work for. According to these factors, traders are categorized into retail, experienced, professional, or institutional.
The categorizations are applied at the KYC stage by forex broker (i.e. during the forex trading account verification). However, depending on the broker and the nationality of the trader, these may not be applied.
Who are retail forex traders? A retail forex trader is a private trader who has not yet met the requirements to be categorized as professional traders. Forex brokers apply restrictions to this type of trader, such as lower leverage (up to 1:30) or a ban on trading risky derivative assets (such as binary options).
Who are experienced forex traders? Forex traders defined as “experienced” are a category found in only a few countries around the world, including Poland. Experienced traders are traders who are not yet professionals, but who are able to manage the risk involved in forex trading. This type of trader is very similar to retail traders, but they are generally allowed to use higher levers (up to 1:100 typically).
Who are professional forex traders? A professional forex trader is a private trader who has large amounts of capital, trading experience, and/or in-depth knowledge of the foreign exchange market. Through a professional forex account, these traders can access very high leverage, even up to 1:400, and have access to a range of options and financial markets that most traders are not given access to.
Who are institutional forex traders? An Institutional foreign exchange trader is a trader who works for a company (usually banks, investment funds, or multinational corporations). The role of forex institutional investors is not so much to generate profits as to protect the company from foreign exchange risk: in fact, multinational corporations make money in different currencies, and an institutional forex trader’s job is to trade currencies so that the profit is not lost due to currency exchange.
What types of forex traders are there?
There are various types of forex traders based on their own trading strategy and time horizons:
- Forex scalper trader
- Forex position trader
- Forex day trader
- Forex carry trader
- Forex hedging trader
- Forex swing trader
- Forex algorithmic trader
- Forex copy trader
Forex scalper trader
Forex scalpers are traders who try to make profits from very small changes in currency prices within seconds. Scalpers need precise trading conditions offered by only a handful of forex brokers in the market (see list here), as their strategy does not allow for mistakes or time wasting.
Forex position trader
Positional currency traders use very long timeframes, even months, in order to profit from market trends rather than speculate on short-term currency changes. This approach is the least stressful compared to other forex trading strategies; however, it remains very risky because forex positions that remain open overnight load overnight fees that can add up day to day and become potentially unsustainable.
Forex day trader
In contrast to position traders, forex day traders open and close trades before the daily market closes. This approach allows them to speculate on the forex market but without having to pay overnight commissions to the forex broker. Most traders fall into this category.
Forex swing trader
Forex swing traders open and close orders by taking profits from medium-term currency prices movements. The swing trading approach, which requires holding open positions even for a few weeks, is somewhere between position trading and day trading.
Forex carry trader
A forex carry trader tries to make profit by taking advantage of different interest rates in currencies. For example, if the interest rate for EUR is 5 percent, while it is 3 percent for USD, the carry trader will buy EUR using USD to try to make 2 percent profit from the different interest rate. This type of strategy, although it may seem simple to execute, requires deep macroeconomic knowledge and especially knowing how to accurately calculate costs and fees from long-term forex trading.
Forex hedging trader
A hedging trader opens two trades in opposite directions to protect against market fluctuations, and closes one of the two when it takes a specific direction. In other words, a forex hedging trader opens both a long and a short position on the same currency pair. In this way, whatever the market movement, the trader neither loses nor gains money. However, if the market moves sharply to the upside, the hedger closes the short position so as to take advantage of the opportunity.
Forex algorithmic trader
Forex algorithmic traders, often shortened to algo traders or called EA traders, are traders who take advantage of algorithms to execute forex trades automatically. Not all brokers allow this type of strategy; in fact, algo traders must use forex brokers to trade automatically. All the best traders in the world use EAs to follow their currency trading strategies, as they allow them to remove the psychological and bias component, and thus bring potentially better results than the human trader.
Forex copy trader
Forex copy traders are traders who copy the trades of more experienced and profitable currency traders. In this way, through a platform suitable for copy trading, they are able to achieve their own performance despite not having the same skills as them.
How to become a forex trader
To become a forex broker, you must follow the following steps:
1. Find a forex broker to use
There are hundreds of forex brokers in the world, each with its own peculiarities. However, it can be complex for a newbie to understand the reliability of each of them, and to understand the forex trading perks and qualities they offer. For this, you can take a look at our list of the best forex brokers in the world.
2. Open a forex trading account
Forex brokers offer numerous forex trading accounts, and among them you can find demo forex accounts. This type of account is 100 percent free, and allows all traders to practice forex trading with virtual money without therefore risking their capital. Once you have gained enough confidence with the demo account, you can switch to a real account (that is, depositing money by wire transfer or credit card).
3. Take forex trading courses
The foreign exchange market is extremely volatile and risky, so you need to know what you are doing. Trading forex without any preparation means exposing yourself to extremely high risks, and potentially losing all the money in your account.
If you do not want to spend money on a paid course, online you can find a large number of free resources such as BabyPips’ trading course.
Do you need a licence to be a forex trader?
A license is not required to become a forex trader, except for some cases where the trader handles third-party money.
For example, if a private trader does not need any license, he may need one from the moment he becomes a fund manager at a forex broker.
Fund managers are traders who trade forex on behalf of clients (usually other forex traders).
In this case, forex fund managers will need a license, which is generally issued by the local regulatory body in the country.
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