There are numerous stories all over the internet about how various people made their fortunes trading forex. This begs the question, is this trade really profitable? Well, the FX market runs for 24 hours a day from Monday through to Friday, and more than $6 trillion is exchanged daily, according to the BIS. This means that there are definitely some winners within that daily turnover who are taking home profits. Statistically speaking, though, 68% of all traders end up making losses in this market.
Can you really profit from trading currencies?
Most people entering this trade treat it as a get-rich-quick scheme, which is the first mistake they make. The truth is, a few traders have managed to make substantial returns in the forex market after dipping their toe in it. To emulate these traders, you’d have to have exemplary skills and knowledge of the market. If you’re a beginner, chances are you do not.
As aforementioned, trillions of dollars change hands every day on this market. This means there are some expert traders taking home millions and even billions in profits. How does one get there? Well, though the majority of beginner traders will count losses, it is possible to be in the profitable group by doing your due diligence and practicing the tips we will outline later in this article.
Do you need much money to make substantial profits?
Usually, the profits you make in forex are calculated in terms of a percentage of your deposit. Therefore, a small investment will not be sufficient to earn you much profit if that’s all you’re trading with. For instance, a 2% profit will not translate to much dollarwise if it is earned by a beginner trader with, say, a $500 deposit. However, the same profit, only this time to an institutional investor managing hundreds of millions of dollars, might just amount to a small fortune.
However, there are ways to improve your yields, even with a small account balance. Most brokers offer margin trading, which allows traders to trade on leverage. This allows you to trade with more than you currently hold in your account. If such a trade results in profit, the net yield will be significantly large. However, if it culminates in loss, you may end up owing more than you hold as your equity.
Leverage explained
By utilizing leverage, your broker essentially lends you the bulk of your trading capital while you put up a fraction of it as a deposit. This deposit is called a margin. For most major pairs, brokers offer leverages of up to 50:1. This means that if your account equity is $1,000, you can take positions of up to $50,000.
However, as aforementioned, leverage also carries some risk. This comes around when your leveraged trade starts making losses. Even a few pips in the wrong direction may amount to substantial losses. Let’s look at a use case scenario.
Imagine a trader with a $2,000 trading capital who takes on the 1:50 leverage. That means they can open a position worth $100,000, which is equivalent to one standard lot. They decide to short the EURUSD pair. If the pair’s price falls 100 pips, they’ll gross a profit of $10 * 100 = $1,000, minus transaction fees. That is nearly 50% of their initial deposit. Similarly, if the pair rallies 100 pips instead, they’ll have lost nearly half their capital on a single trade.
Tips for profitable trading
- Choose your broker wisely
There are many scammers in the forex market, and some of them masquerade as brokers. For this reason, always do your due diligence before settling on a broker. Read their customer reviews and ensure they are regulated by the relevant statutory bodies.
- Invest wisely
Once you’ve chosen your broker, now comes the time to choose which pairs to invest in. Only invest in pairs on which you’ve done extensive research. The more you know about a pair, the better. Also, develop a viable trading strategy that has passed both backtests and forward tests. For a start, it is wise to utilize a demo account before learning the ropes. When you start trading with real capital, never invest more than you can afford to lose.
- Perform risk management
Risk management involves measures such as setting appropriate stop losses and utilizing a good risk to reward ratio. You should never risk more than you stand to gain in profits. A good rule of thumb to follow is to never risk more than 1% of your equity on one single trade. This ensures that in the event you make continuous losses, which is not uncommon, you’ll have the chance to recover. Additionally, avoid using too much leverage, as this may amplify your losses.
- Avoid emotional trading
Emotional trading is a trader’s worst enemy. Once you start trading out of anger, greed, fear, or excitement, that’s when your losses begin. Therefore, always keep a cool head and remain objective with your trading decisions. This can be achieved by always sticking to your trading strategy.
- Keep up with world news and economic events
Currency prices are often moved by major economic events of their countries of origin. Further, the political happenings of such countries, such as elections and wars, have a pronounced effect on the value of their currencies. Therefore, you should always keep up to date with these events and factor them into your trading decisions. This is called fundamental analysis.
Conclusion
The forex market offers numerous chances for traders to profit from currency price moves. However, it is not without its risks. One can make significant profits from this trade, but that involves careful consideration of several factors. To ensure the success and longevity of your trading career, you should always keep in mind the tips we’ve discussed herein.