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FOREX

How to Trade Forex

By Editorial team | Updated March 13, 2023 (Published 13/3/2023)

Prior to the recent cost-of-living crisis, the last significant economic downturn occurred in 2008. At this time, the ‘Great Recession’ ripped the heart out of the global economy, following a subprime mortgage collapse that was inspired in part by continued, reckless borrowing practices.

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However, this ushered in the age of the accidental entrepreneur, which has helped to create a ‘gig economy’ that’s continued to thrive throughout the developed world.

In the UK alone, gig workers contribute £20 billion to the economy, while 48% of those who operate in this space also hold down a full-time job. The latter statistic is telling, as it explains the rising demand for passive income streams through various investment markets.

This includes forex trading, which is a highly volatile but popular practice that can deliver disproportionate returns over time. But how can you make this work as a secondary income stream?

What is Forex Trading Trading?

Forex, or FX, trading describes the buying, selling and exchange of international currencies, in an over-the-counter (OTC) marketplace that’s highly leveraged and accessible. Currencies are traded in pairs and speculatively, enabling you to leverage price fluctuations both positive and negative to your advantage.

You can do this without assuming ownership of the underlying asset too, creating far greater flexibility in the marketplace and the ability to accumulate short-term profits.

There are three fascinating aspects of forex trading, each of which have a key impact on the marketplace. These include:

  • Volatility: The FX market is renowned for its innate volatility, with the price of currencies vulnerable to supply and demand, macroeconomic factors and the trade flows (and relations) between relevant countries. This has been borne out recently, with double-digit inflation and a base interest rate of 4% in the UK causing significant fluctuations in the value of the British pound.
  • Liquidity: This is defined as the ease with which an asset can be converted for cash, or bought and sold in an open marketplace. Currencies happen to be among the most liquid financial market assets even when traded speculatively, of course, especially when you target major pairs such as the EUR/USD. High liquidity is particularly valuable during times of economic tumult.
  • Leverage: I’ve already touched briefly on leverage, which is related to margin and allows you to open positions that are considerably larger than the value of your cash deposit. Leverage is applied as a ratio and is capable of delivering seismic returns, although it can also underpin disproportionate losses if the market turns against you. So, it should be treated as a double-edged sword at all times.

How to Trade Forex as a Secondary Income

The question that remains, of course, is how can you learn to trade forex as a secondary income? After all, highly volatile and leveraged markets are linked with increased risk, and you’ll need to minimise this if you’re to achieve success. Here are some strategies to keep in mind:

#1. Build Theoretical and Practical Knowledge

While it can be hard to commit to research as part of a secondary income stream, it’s important to note that FX trading success is often built on a foundation of knowledge, insight and determinism.

Theoretical knowledge and understanding can be built through trading courses and literature, of course, while you can use ‘demo accounts’ to execute practical trades in a completely risk-free and simulated marketplace.

This enables you to build resilience and understand the underlying laws that govern change when trading forex, which in turn creates a sense of determinism that negates the risk of emotive trading.

All forex brokers offer access to a demo account through the trading platforms, while this software can usually be used for between three and six months as you strive to back test your strategies and experiment with various types of analysis.

#2. Consider Which Strategies Best Suit Your Risk Profile

The FX market offers variable opportunities to traders, while there are also a number of strategies that can be deployed to optimise profits.

Technology and innovation has created even more opportunities over time, with so-called “arbitrage trading” offering a relevant case in point.

This utilises dedicated forex arbitrage software to profit from temporary and short-term market inefficiencies, which usually lead to mispriced assets or different offerings from brokers.

This is arguably a subset of scalping, which is a short-term trading strategy that encourages you to maintain hundreds of open positions for a matter of minutes each day. The key here is to make incremental gains from each position and leverage the market’s natural volatility, with this ideal if you have a healthy appetite for risk.

Other popular FX strategies include day trading, swing trading and position trading, each of which operate different timeframes and risk profiles accordingly. As a part-time trader, however, swing or position trading may be ideal as they work with extended timeframes and require less frequent and intense research.

#3. Choose Your Currency Pairings Wisely

This is another crucial factor, as we’ve already touched on the different types of currency pairs available in the market.

When starting out as a part-time forex trader, it’s crucial that you start relatively small and scale your efforts organically over time (in line with your success and increased knowledge base).

We’d also recommend choosing your currency pairs wisely, perhaps starting out with one or two major pairings that offer optimal liquidity and minimal volatility. This way, you can benefit from relatively predictable assets and start to accumulate wealth gradually over time.

#4. Understand the Role of Risk Management

Regardless of how often you trade, risk management will play a key role in optimising your profits. This is especially important when you trade forex as a secondary job role, as you’ll initially be using money from your primary earnings as capital.

But what steps can you take to manage your risk? Fortunately, trading platforms deploy a number of automated measures that can be used in this respect, including stop loss and take profit orders.

These work by automatically closing positions once they’ve incurred a predetermined level of loss, or a profit margin that you’re comfortable with. You can apply these to specific orders, and manage your risk in accordance with your outlook and level of starting capital.

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