The naysayers say currency trading is too hard for the average person to understand and therefore to profit. They view trading two currencies against each other (yes, that is what every currency trade really is) for a profit as simply too complicated. While it is true that understanding how to finance positions and what costs a trader must expect to incur can prove difficult, the most common trading account failures actually can be traced back to trade mechanics.
If you are bringing new traders onto a trading desk or building out an onboarding process for your retail traders, you would be well advised to focus on the structure of trading forex rather than laying out a slew of strategies. A simple 10 page guide to contract specification, margin, and the different sessions that the different market centers are open would surely add far more value to a new trader than a download of every indicator package available. Below are four key areas where even a basic level of understanding will save traders a small fortune, and can form a great basis for any trader, regardless of experience.
Quoting conventions carry more information than they seem to
This misunderstanding comes from two sources, most retail clients perceive forex for what it looks like on the surface – i.e. 2 currencies traded against each other with a ‘price’ which can go up and down. However, perception is often 100% wrong and as has already been mentioned the ratio of the 2 currencies is crucial to the trading of currency pairs. Some examples, EUR/USD, the Euro is the base and the USD the quote currency. Thus all profit/loss is incurred in $ and pip value is fixed for a trading account denominated in $ (assuming no stop loss slippage). Conversely, USD/JPY, the JPY is the base and the USD the quote. Once again, all profit/loss is incurred in $ but the value of a pip (for a $ account) fluctuates in line with the rate of the currency pair in question.
Crosses are not independent instruments
EUR/GBP behaves largely like a long position in EUR/USD vs short position in GBP/USD, often with lower liquidity than either of the individual markets. Cross currency trades are very often just leveraged versions of existing views held by the trader in other markets. Consequently the correlation exposure in a portfolio of 5-6 trades can be much greater than that trader realizes and amounts to a very large dollar denominated bet.
The real cost of a trade is rarely the advertised spread
Execution cost in trading consists of three components, the spread (the bid-offer) at time of entry, the trading commission (per lot traded), and the slippage (the difference between the price at which the trade was requested and the price at which it actually was executed). A good average spread quoted by a provider in a general sense means very little, and can in fact deteriorate dramatically at random times, especially during big data releases and around overnight rollover times for example, when many retail traders are active.
Overnight financing costs (sometimes also referred to as swap charges or swap credits) are typically not taken into account by traders. Exchanges in currencies can occur overnight, meaning that when a trader opens and then closes a position in the same currency within one trading day, no overnight financing costs are incurred. On the other hand, if a trader holds the same currency position overnight, there are costs incurred, usually on a per annum basis for both long and short positions in both the base currency and the exchange currency, and these are marked up by your broker as well.
Model the cost before the trade, not after
- Calculate the round-trip spread cost in account currency for the intended position size.
- Add expected commission on both sides.
- Estimate swap for the likely holding period, including the triple-charge weekday.
- Express the total as a percentage of the target profit. Anything above roughly a fifth deserves a second look.
Leverage is a margin mechanism, not a return multiplier
Just because a retail trading account allows for high leverage does not mean that there is also high potential return. The high leverage in retail trading serves to reduce the capital required to open and maintain a position. Thus the high leverage allows a large notional trade to be opened with a small amount of equity. Instead of focusing on what leverage is offered by your online broker, determine the notional trade size that your account can afford to lose.
Working back from the stop loss, it is possible to work out an appropriate trade size in terms of percent equity risked per trade. This is then a straightforward calculation of percent equity risked divided by the number of pips in the stop loss, expressed in the currency of the chart window. Leverage then becomes a constant that is derived from this (as opposed to being a parameter that is chosen a priori). Anyone still unsure how these numbers fit together should work through a structured forex trading guide before committing real capital.
Liquidity follows the clock
While the markets are open 24 hours, conditions vary between sessions with the largest centers open at different times. Trading methods developed in one window rarely translate to another.
| Session | Typical character | Best suited to | Main hazard |
| Asian | Narrower ranges, thinner books | Range and mean reversion approaches | Wider spreads on non-Asian crosses |
| European | Rising volume, directional moves begin | Breakout and trend entries | Early false breaks before London fixes |
| London and New York overlap | Deepest liquidity, highest volatility | Larger size, tighter execution | Data-driven reversals |
| Late New York | Volume drains away | Position management, not initiation | Rollover spread widening |
Analysis serves risk control, not prediction
Fundamental analysis explains why a currency is trading in a certain trend over the span of weeks (interest rate expectations, inflation numbers, the central bank) whereas a technical analysis of a chart explains where the stop loss and the optimal trading size for a given trade would be.
What a beginner should actually track
- The policy rate path for both currencies in every pair traded.
- Scheduled releases for the coming week, with position sizes reduced around them.
- Current volatility relative to its recent average, since stop distances should widen as ranges expand.
- Trade outcomes recorded with entry reasoning, so the record can be reviewed independently of profit and loss.
If you are serious about becoming a long-term trader of the currency markets then disciplines 1-4 need to become second nature to you. You are operating in an environment where the edge to making consistent returns is very thin. All four aspects have to be calculated and monitored for you to survive as a trader.