Over the last decade, the exclusivity surrounding stock market trading has started to loosen, and people who thought that they would never have a chance to trade stocks, options and forex now have far more options to invest if they want to.
Whilst not always successful, this more open market has seen some rather interesting results, and a new generation of traders has emerged that built up their knowledge, assessed the risk of their decisions and made money as a result.
However, as many traders will know, money makes the world go around, and a lot of individual traders who are just starting out may struggle to get forex funding to expand their portfolio and test intelligent and unconventional strategies.
Forex, in particular, was difficult to take part in as an individual because it inherently required a lot of capital. This has since changed dramatically.
To understand why, and how you can get involved yourself irrespective of your expertise, here is a brief history of forex, how investors make money and how you can get involved too.
What Is Forex?
In the trading world, forex, short from foreign exchange, is the market where national currencies are traded with each other. Most people will have interacted with the forex market on an exceptionally small scale if they, for example, travelled to another country and swapped one currency for another.
Forex trading works on roughly the same principle but on a much larger scale, with traders investing based on the idea that one currency will end up stronger against the other and making money based on the differences in exchange rates.
A small-scale example of this would be if you traded £10 for dollars at a rate of $1.5 to the pound, you would have $15 and made the first step of a forex trade.
Then, if the pound collapsed for whatever reason and you could only get $1.25 to the pound, your dollars are worth more, and if you trade them back you can buy more pounds with your dollars. In this example, you would have made a £2 profit.
Of course, forex is undertaken on much larger scales, typically traded in lots of 100,000 currency units, which if that hypothetical trade was undertaken with £100,000 rather than £10, the investor would make £20,000 on the trade. It is only truly profitable at scale, and with scale comes risk.
Typically, forex trading is undertaken in pairs of currency, such as GBP/USD, with the currency on the left being the base currency, the right being the quote currency, and the exchange rate being the cost to buy a single unit of said currency.
Of the 170 currencies around the world, eight are regularly traded as part of forex currency pairs. Here are the eight, in order of popularity:
- United States Dollar (USD)
- Euro (EUR)
- Japanese Yen (JPY)
- Pound Sterling (GBP)
- Australian Dollar (AUD)
- Canadian Dollar (CAD)
- Swiss Franc (CHF)
- New Zealand Dollar (NZD)
The forex market is popular because it is the most liquid market, the most fast-paced market, is not confined to stock market trading times so is open for five and a half days a week, 24 hours a day, and making successful hedging strategies is based around knowing the market and planning around world events.
It is also a decentralised market, with individual trading terminals and computer networks connecting trades rather than an overarching stock market.
How Do You Trade Forex?
The key to forex trading is the same underlying goal that stock market investing is driven by; you buy low, sell high and profit off the difference.
Essentially, successful forex trades are about speculating on the strength of currencies relative to each other, buying currencies that are set to increase in value and selling currencies at their peak before they are set to decline.
Much like other forms of assets, there is a range of markets you can trade in, each benefiting a certain type of trader.
The primary market for forex is the spot market, which operates in real-time and currency pairs are swapped based on supply and demand in the moment. This is by far the largest forex market, and often when forex trading is discussed, it typically means spot market trading.
However, there are alternative products that can be beneficial in a few situations depending on the nature of a trader’s portfolio and risk tolerance. These are the forward and futures market, which are more focused on speculation but are used in different ways.
The forward market is where traders enter a binding contract to lock in an exchange rate, which if buying will benefit you if the exchange rate goes up and selling will benefit you if the exchange rate goes down.
The futures market is the trade of forex currency pairs on a more conventional stock exchange, with a future being the purchase and sale of set amounts of currency at a set price
How Do You Get Funding?
As many traders can attest, a lot of small-scale trades are not always worth it, as once trading fees and exchange fees are paid, even a successful trade may only net a tiny profit.
The solution is to scale up, make bigger trades and therefore make a significantly higher relative profit once fees and expenses are taken into account.
The problem with this is that making big trades requires a lot of money, and given that whilst forex trading can be profitable, it can also incur significant losses if the market shifts suddenly or wider market factors are not taken into account.
For individuals, that level of risk is understandably unacceptable. Few people can bet everything on the market and even fewer can afford to lose everything.
This is where funding programs can help talented traders acquire the capital they need to make trades, in exchange for a percentage of the money made. This helps traders take on greater positions without the fear of losing everything and more in the process.
Funding programs tend to be selective and can take a variety of forms, but typically to become a funded trader, you need to demonstrate effective trading skills, risk management and knowledge of the market. Most programs also have an initial start-up fee or deposit.
Aside from TradingFunds, which has a single-phase evaluation program, other funding programs have a multi-step process where a trader is given a demo account and is instructed to reach ten per cent profit within a set period of time.
Often this includes specific rules about maximum drawdowns, trading limits and minimum days, as a way to test a trader’s ability to control risk and how they manage several different trading scenarios.
The exact nature of these tests varies but they are undertaken to test not only a trader’s knowledge but their ability to manage pressure and emotions. Forex trading can be risky, and it is important to develop carefully considered strategies free from emotional impulses such as greed or fear.
Most tests on demonstration accounts will test this, and having money on the line in the form of the evaluation fee will at least in theory help see how traders act without being either completely insulated or completely exposed to the risks involved in real forex trading.
It also allows firms to check a lot of different traders as opposed to checking the background of each trader and seeing what they have achieved in the market thus far.
Because of this, whilst the specifics may vary, an evaluation will involve a realistic simulation of market conditions to simulate an actual trading environment, reasonable targets and limits that provide a challenge but are possible, and clear accountability and support.
Most programs have a profit target and a maximum drawdown limit, to encourage trading and effective risk management rather than gambling.
Once they pass these requirements, their demo account will be replaced with a trading account with real money. This account will often increase in size as a trader proves they can make consistent profits with larger portfolios.
As well as this funded traders have access to a wide range of resources beyond capital, and thus reduced risks should a trade go wrong. As resilience is a key aspect of success in investing, traders are often tested not only when the market is bullish but also when it is bearish as well.
After all, in investment, it is not about how hard you hit the market, but how hard you can get hit and keep moving forward, and it is not about individual successes and losses, but overall success and profitability.
The main benefit beyond capital is access to a support network that can help provide guidance, expertise and the ability for traders to develop their skills and continue their success as traders.
Many funding platforms offer mentorship programs and training in a wide range of different trading strategies, allowing traders to find the strategies that suit them and their investment style best, particularly in the world of forex where a lot of individual traders often lack the capital to truly invest.