19 April 2024 - 12min Read

Forex trading

Can you make money trading forex?

Despite over 50% of traders losing money in the financial markets, there is still an opportunity to be successful when trading is approached the right way. Nevertheless, rather than being an easy route to riches for the typical retail trader, forex trading can be a rough journey with potential losses along the way. This is where your most valuable assets are created - experience and screen time! This article will discuss the possibilities and probabilities in the journey of a forex trader.

TABLE OF CONTENTS

Key takeaways

  • Many retail traders expect quick and unrealistic returns using leverage.
  • According to statistics, the majority of ambitious forex traders fail, and some even lose substantial sums of money.
  • Leverage is a two-edged sword in that it may result in enhanced losses  as well as enhanced gains.
  • Counterparty risks, platform failures, and abrupt bursts of volatility are all obstacles for aspiring forex traders.
  • Unlike stocks and futures, forex pairs trade in an over-the-counter market with no central clearing exchange.

What does it take to become a profitable forex trader?

If you've ever tried to learn a skill, you know how much time, dedication, and practice it takes to achieve any expertise. Trading professionally in the financial markets requires effort and dedication to become a master of the discipline.

As part of an overall trading strategy, you will need to establish rigorous and consistent risk management. The ability and discipline to use this approach and manage your positions under all market scenarios is a prerequisite for a successful trader.

For most individuals, forex trading as a full-time job isn’t a practical career choice for a variety of reasons. Yet despite the risks, many individuals have taken advantage of  working from home to engage in  online forex trading.

Like learning to play a musical instrument, trading forex successfully requires significant practice. Therefore, you must backtest your trading techniques first on historical charts and then on demo accounts on the live market before jumping in with your real money.

Is trading forex for a living good for you?

Numerous variables might influence whether or not trading forex for a living is good for you. First and foremost, you must dedicate the necessary time to learning about the complexities of the forex market and what successful trading requires. Forex trading may be suitable if you have the time, money and motivation to commit to the journey. But it's definitely not a walk in the park and will take a considerable amount of time and effort just to get started.

Understanding forex trading strategies

Once you've decided that you have the time, money, discipline, and desire to study the forex market, you can start by learning about different trading styles and techniques.

Your "risk tolerance" is an important issue to consider. This entails understanding the degree of risk and financial loss which would make you feel uneasy. So to start, you must work out how much money you're prepared to lose if everything goes wrong. To evaluate if you'd be comfortable as a full-time forex trader, you'll also need to figure out how you cope with making or losing money. Any particular strategy you adopt may also significantly impact the degree of financial risk you face as a forex trader. 

Additionally, researching what sorts of techniques and trading styles perform best in the moderately volatile forex market is a fantastic beginning to start determining what could work for you as a forex trader. Some traders, for example, prefer not to take overnight positions and instead utilise day trading or scalping to minimise risk.

Trend traders, on the other hand, often hold trades for months to benefit from riding a large price trend, whilst swing or momentum traders try to profit from both trending and counter-trend corrections and may hold positions for many days. Employing longer-term tactics exposes a trader to the additional danger of leaving positions open overnight when they cannot be monitored. This is particularly an issue when trading individual equities.

You follow a trading plan

Trading forex on a part-time basis is unlikely to provide you with the necessary experience  to begin trading professionally. Most professional traders have spent years perfecting their talents in order to be able to trade forex for a livelihood.

After you've decided on a strategy, you should  create a trading plan to increase your chances of success. You might begin by devoting some time each trading day to only watching the FX market, rather than trading it. You may start with a demo account and progress to a funded account as you acquire confidence.

Getting used to trading on a demo account prepares potential traders for forex market volatility and offers you a broad sense of how the markets move. Having a regular trading regimen will help you get expert knowledge and is crucial if you're serious about trading forex for a livelihood.

A well-defined risk strategy and good money management concepts, including position size rules and exit strategies, are vital elements of a solid trading plan. To lower your total financial risk, you should generally place defensive stop-loss orders in the market anytime you are not directly monitoring a position.

You are willing to invest time and energy

The forex market monetarily represents the state of the whole country's economy, and geopolitical events and natural catastrophes are only a few factors influencing currency prices.

While the decentralised currency markets are open from Sunday afternoon to Friday afternoon, New York time, they break down into specific trading sessions. Understanding this can considerably increase trading possibilities in certain currencies during one or more trading sessions.

To become a full-time forex trader, you must be willing to put in the time and effort required to find and execute trading opportunities. Experienced traders employ technical and fundamental research to identify and trade market trends and corrections.

Since currencies trade in pairs, the forex market's assessment of the relative economic strength of the two countries represented in the pair has a direct influence on price. This is why most successful forex traders pay close attention to economic data releases, elections, and central bank rate decisions.

Many effective short-term traders apply technical analysis to identify buying and selling signals. Some traders may open positions based on the outcome of national elections or other geopolitical events that may influence market views of a currency's relative worth.

You can modify and improve your trading strategy

Many traders discover that although a particular trading technique may work for a while, its profitability declines over time as market circumstances change.

This may be caused by various circumstances, such as other traders using similar tactics or the market developing in a manner that invalidates trading signals that used to work in the past.

Good traders must be adaptable. Thus, they will change their methods to changing market circumstances rather than keeping them stagnant. To become a great trader, you must learn to recognise when your approach is failing and alter it accordingly.

You understand financial management

One of the most important aspects of trading is money management. In trading, it's not always about how much money you make on your winners that keeps you in the game; it's about how you limit your losses on your losing trades.

Prudent money management will considerably lower your risk and safeguard the funds you have invested in your trading account as risk capital.

For example, a standard money management approach is allocating a set proportion of the account's value to each FX position. The chance of losing the whole account balance by risking it on one or two positions is considerably decreased by merely exposing a tiny proportion (i.e. 1-2%) of the account to market risk at any moment.

The trailing stop is another significant tool. This entails putting a stop-loss order on an existing position, then scaling that order up on long positions and down on short ones as the price moves in your favour.

You are aware that everybody loses money from time to time

Trading FX is often viewed as ‘gambling’ in the minds of some observers as there is always a  risk of losing money. Many traders suffer more losses than gains because they close their winning traders out of fear of giving back paper profits while allowing their losing trades to run on, in the hope that the market will turn back in their favour. 

Understanding when you're wrong and accepting a loss while trading is one of the most important aspects. In addition, implementing sound money management practices into your trading strategy might help you cut your losses dramatically.

If you decide to trade forex as a lifetime career choice, you should be aware that losing money will be an inevitable part of the trading process. Therefore, you should get used to it. Remember that incurring several minor losses may easily be compensated by just a couple of winning trades.

Do you have what it takes to make a living trading forex?

Trading forex is done on margin and employs leverage. It differs from investing in the stock or bond markets because you can lose all your deposited money. Your personality type and aversion to risk will also determine if you have what it takes to trade in forex markets professionally. You will also need enough free time to learn and practise the skills.

Although the basics of forex trading are quite straightforward, trading successfully is difficult for everyone, and most retail forex traders lose money.

People who want to invest in forex markets but only have a limited time might use popular alternatives such as social trading. Social trading allows you to replicate the trades of other forex traders with proven track records.

Why can you lose money trading forex?

Surprising events

The unexpected action by Switzerland's central bank in early 2015 caused losses in the hundreds of millions of dollars for traders, ranging from tiny retail traders to huge institutions. Retail trading account losses wiped out many brokers to the point of bankruptcy.

Unexpected one-time incidents are not the only dangers that forex traders face. Here are a few more:

Leverage

The attractiveness of forex trading stems from the use of  leverage, which compounds winnings and losses. The leverage permitted in certain regulatory environments may be as high as 200:1. Excessive leverage is the single greatest risk factor in retail forex trading, which is why authorities in many countries limit leverage.

Asymmetric risk-reward ratios

Seasoned forex traders limit their losses and counter them by looking for  large returns on profitable trades by employing a sensible risk-to-reward ratio. On the other hand, most retail traders do the opposite, achieving tiny gains on a number of positions but then hanging on to a losing trade for too long and suffering a significant loss. This might potentially lead to a loss greater than your original investment.

Institutions have the edge over retail traders

The largest forex trading institutions have vast trading operations linked to the currency world and have an information advantage that a retail trader does not have.

Volatility

Because of leverage, price movements can be extremely fast during extraordinary currency volatility. Except for those scheduled in the economic calendar, events may occur unexpectedly and influence the markets before most individual traders can respond.

Over-the-counter (OTC)

The forex market is an OTC market that is neither centralised nor regulated in the same way that the stock and futures markets are. This also implies that no clearing body guarantees trades, which may lead to counterparty risk.

Manipulation

There have been isolated examples of currency fraud, such as Safe investment, which vanished with more than $1 billion in investor assets in 2014.

Forex rate market manipulation has also been widespread, including some of the most powerful participants. Stop-loss hunting is a frequent method market movers use to influence the markets. These major companies will coordinate price changes based on where they believe retail traders have put their stop-loss orders.

Final thoughts

Making money from Forex trading may appear straightforward. But in reality it's challenging, and requires a lot of hard work and study. Yet, owing to leverage, a devoted forex day trader with a good technique, a good win rate and risk/reward ratio may earn a fair return on investment (ROI) every month. And as you gain experience, you may want to increase your account size where it makes logical sense based on your own goals.

People also asked

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Some day traders may successfully trade forex by applying themselves to the markets for just a few hours per day. Of course, the more time you dedicate to it, the greater your chances of success.

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Stocks, or individual equities, can provide a wider range of alternatives and offer a greater range of risk levels than currency trading, but they need much more capital to get started. Forex trading is also carried out 24 hours a day, although stock trading hours are more constrained. You may gain (or lose) money in every market, but the essential thing is to understand your specific market and how to trade properly.

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Since the amount required to generate a big profit in forex might be enormous, many traders use excessive leverage. The expectation is that their leverage would result in profit. However, leveraged positions also increase the potential for losses dramatically.

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Forex trading differs from trading in individual equities. Most stock traders will buy and hold equities for months or even years, while forex traders are usually in and out of the market by the minute, hour, or day. Because of leverage, the timescales are substantially shorter, and price swings have a much more noticeable influence.