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The Business of Trading Currencies by Kathy Lien

Whenever you are devoting money to trading, it is important to take it seriously. Many traders are getting into the FX market for the very first time and are starting from square one.  Thankfully, this is not so daunting as it would initially seem because unlike some of the other markets, there are a variety of resources available for new traders including virtual demo accounts, mentoring services, online courses, research, signal services and charts.  With so many things to choose from, the most common question asked by traders is, “Where do I Start?”

The first step is to pick a market maker to trade with. Over the past few years, many different market makers have emerged, some larger than others, some with tighter spreads and others offering additional bells and whistles. Each market maker has its own advantages and disadvantages but the basic questions that you have to ask when you are doing your due diligence include the following:

  1. Where is the FX market maker incorporated?  Is it incorporated in a country like the US and the UK or is it incorporated offshore?
  2. Is the FX market maker regulated, if so, in how many countries?
  3. How large is the market maker?  How much excess capital do they have, how many employees?
  4. Do they have 24 hour telephone support?

The reason why a lot of these questions are important is because you want to find a large market maker that is regulated in at least one or two major countries to ensure as best as possible, that the money that you are sending to them is safe and that in the event of a bankruptcy, you have a jurisdiction to appeal to.  Also, the larger the market maker, the more resources they will probably put towards making sure that their trading platforms remain stable and do not crash when the market becomes very active.  Secondly, you want a market maker that has a larger number of employees because in an event of fast moving markets, servers can become overloaded, so you need the ability to call your broker to place a trade over the phone without having to worry about hearing endless busy signals.  The bottom line is that you want to make sure that you are trading with someone legitimate and not with a bucket shop.

Once you have found a broker, the next step is to open a demo account.  The availability of demo or virtual trading accounts is something unique to this market that you want to exploit to your advantage.  Most demo accounts have the exact same functionalities as the live accounts with real time market prices, The only difference of course is that you are not trading with real money.  This gives you a chance to not only make sure you know how to use the trading platform a hundred percent, but also to get a feel for the market, practice some trading strategies and make sure you are able to make money in the paper account before actually funding with real money and moving onto a live account.

In the process of demo trading, you want to take advantage of all of the resources that are available out there:

Books, Newspapers, Magazines, Research

There are many types of books and newspapers to choose from. Before trading the FX market, you want to develop a good foundation of how to analyze the market. When picking a book to read, make sure that the book covers:

  1. Basics of the FX market
  2. Some technical analysis
  3. Key Fundamental news and events

Since the FX market is primarily a technically driven market from a speculative perspective, the best book that a new trader can read is one on technical analysis.  The better you get at technical analysis, the better you can trade the FX market from a speculative perspective.

When it comes to newspapers, seasoned foreign exchange traders typically prefer the Financial Times over the Wall Street Journal simply for the fact that the FT is more global in nature.  However, trading FX involves having a far broader scope than just economics since politics and geopolitical risks can also impact a currency’s trading behavior.  Therefore it is important to also read major non-financial publications like BBC or the International Herald Tribune.

The best magazine to read is of the Economist, because it covers many macro themes, but currency specific and trading magazines are also popular.

Once you have your foundations set after learning how to trade the FX market, it is time to keep up to date on daily fundamental and technical developments.  For that, there are a variety of free FX specific research websites that can be found easily on the internet.

Education and Mentoring

One question that is also frequently asked by new traders is if they can purchase a book on FX trading, do they really need an course or mentor.  The benefits of online or live courses over books, newspapers and magazines is that you get to ask questions and hear other people’s questions.  Mentors draw from their experience and hopefully will teach you to avoid their same mistakes while courses give you the opportunity to thoroughly understand how to trade the market from different perspectives.  Hearing or seeing other people’s questions is extremely valuable since no one can possibly think of all of good questions to ask. In a classroom setting, either online or live, you can learn from the experience of others and learn from their questions as well.

Trading setups > News, Charts - what type is best for you

Now that you have built a solid base of knowledge, it is time to figure out what works for you.  Every trader is different, some are day traders, others are swing traders while some are technical while others are fundamental.  The best trading style is actually a combination of both technical and fundamental analysis.  The reason is because fundamentals can easily throw off technicals while technicals can explain movements and pauses in movements that fundamentals cannot.  Smart traders will always be aware of the broader fundamental picture, never fade the fundamental outlook and use their technicals to pinpoint good entry and exit levels.  Combining both will keep you out of as many bad trades as possible and works for both day traders and swing traders.  Most free charting packages has everything that a new trader needs to work with and many trading platforms offer real time news feeds that will keep you up to date on economic news.

What about systems and signals?

Many traders also ask about whether it is worthwhile to buy into a system or signal package.  The most important point to understand is that generally there are 3 categories that define the methodology of a system or signal – trend, range or fundamental.  Fundamental systems are very rare in the FX market and are mostly used by large hedge funds or banks because they are very long term in nature.  Therefore the systems that are available to individual traders are usual trend systems or range systems.  Rarely will you get one that is able to exploit both markets, because if you do, then you pretty much have found the holy grail because the most difficult part of systems trading is finding a switch that can identify whether you are in a trend or range bound market.

Before you get started, arm yourself with the best resources. Find a good broker and a suitable charting package.

Kathy Lien
Kathy Lien

KATHY LIEN is Managing Director and Founding Partner of BKForex Trading Signals and BK Asset Management. Having graduated New York University 4 years early, Kathy started working on Wall St at the age of 18.

Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures. In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market. In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research and in 2012, she decided to branch out on her own with Boris Schlossberg to start BK Asset Management.

As an expert on G20 currencies, Kathy is often quoted in financial newspapers worldwide and appears regularly on CNBC. Kathy is an internationally published author of Day Trading & Swing Trading the Currency Market, The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game.