How to start trading forex in the US
Have you had your fill of video meetings and the new lockdown daily grind? More and more Americans are using the freedom that working from home gives them to start trading currencies. The foreign exchange (forex or ‘FX) market is attracting a lot of US traders. It often starts as a side-hustle for a bit of extra cash, while others turn trading into a full-time career.
Are you interested in starting in forex trading from home? Whether you’re looking at trading part-time or full-time, in this article we’ll talk you through all the essential information you’ll need to set up a forex trading business from your home office.
Let’s start with the basics.
What is forex trading?
Foreign exchange (or forex) trading is the biggest capital market in the world. With a daily trading volume of over $6 trillion it’s bigger than all the stock, commodities, futures and other markets combined. In forex you trade one currency for another to take advantage of changes in exchange rates. You can open trades worth millions of dollars or start with 10s and 20s. That means anyone can join in, from big banks to individual investors.
Every hour of every day, greenbacks are being traded for euros, pesos, lira and other currencies around the globe, as traders look to profit in the ongoing changes in the value of one currency against another.
The forex market is largely unregulated. It doesn’t have a centralised intermediary like the NASDAQ or NYSE, so trades happen over-the-counter. That makes it open to newcomers. Anyone can execute trades via the internet with other traders around the globe. A buyer could be in Cincinnati, while a seller could be in Singapore.
How does it work?
How do you make money as a forex trader? As with any marketplace, the laws of supply and demand apply.
When demand for a currency goes up, so does its value relative to other currencies. When demand goes down, its relative value goes down and the exchange rate changes.
If a currency you’ve purchased goes up in value versus the currency you sold, you can make a profit. If the reverse happens, you take a loss.
That means you have to select a currency pair in order to make a trade. Price movements between the currencies in a pair determine the value of one currency against another. While the list of potential pairs is lengthy, the most commonly traded are those from the world’s five biggest economies.
There’s a level system in place: Majors, Minors, and Exotics. The majors include the US Dollar, Euro, Pound, Swiss Franc, Canadian Dollar, and New Zealand Dollar.
Major pairs mix the US Dollar with one other Major, so for example USD/JPY, or EUR/USD. Minors are comprised of other two Majors that aren’t the greenback; so for example, EUR/GBP or EUR/JPY.
Exotics are pairs made up of currencies from fast-growing economies; they include the Russian Ruble, Singapore Dollar, and the Chinese Yuan.
Starting out as a forex trader in the US
If you’re new to forex you’ll want to do some research and get some practical experience of trading under your belt to see how it all works. Assuming you’re new to the forex game, here are the starting steps:
01 Choose an online forex broker
Now, it has to be said that Uncle Sam doesn’t always make life easy for US forex traders. The capital requirements and regulatory rules for forex brokers in the USA are restrictive compared to countries like Australia and the UK. That means there are fewer brokers to choose form, and the range of services they offer can be limited.
However, Americans do have options. There are loads of online forex brokers to choose from when searching forex brokers for US traders (residents). See the list here or do some digging on Trustpilot to work out who has the highest satisfaction ratings. Then make a shortlist and choose one or two to try out first.
02 Get a demo account
Once you’ve selected a broker, the next step is to sign up for a demo trading account. Demo accounts are simulated platforms where you can start trading currency and getting to grips with the mechanics of forex trading straightaway, but in a safe environment where there’s no real money is at risk.
Demo accounts are hugely popular as they enable novice traders get practical experience of trading, and ‘feel’ what it’s like to make trading decisions that can lead to gains, or potentially put funds at risk.
That freedom to gamble with pretend money is vital to refining your trading skills, and preparing for the day when you put your own capital at risk. Even if a bad trading decision tanks your funds, the loss is virtual. You can notch it up to ‘lessons learned’, and you’ll identify the weaknesses in your approach, allowing you to change tack.
03 Decide how much virtual money you’ll start with
A demo trading account will typically offer standard amounts to fund your demo trading account with. Starting out with $10,000 should be enough virtual funds to keep your trial period going and experiment with the trading platform’s tools. If don’t have much prior forex or finance experience, you can learn the ropes by using the demo account’s tutorials and other learning resources to swot up.
04 Start developing a trading strategy
With a reputable forex broker and a demo account, you can start trading and start learning the ins and outs of currency trading.
After that, the next phase of the journey is to start building an informed forex trading strategy. Losses can occur in forex trading, particularly when markets are volatile and prices are rising and falling in quick succession. Especially if you’re working from home, you’ll need to be able to make trading decisions independently.
Spend some time on a forex demo trading account to get the feel of how everything works, and familiarize yourself with risk management tools and techniques.