As the world's largest financial market, the forex attracts millions of participants from around the globe on a daily basis. The result is a highly liquid, diverse trading venue that caters to the needs of retail and institutional investors alike. Whether you're a forex market newcomer or professional, the ultimate goal of active trade is the same: sustain consistent profitability.
So, is it possible to actually make money trading currencies on the forex marketplace? The answer is yes. Although succeeding as a foreign exchange trader is not easy, it is done every day by people from all walks of life. Given the proper resources and understanding of risk management, forex trading can be a profitable endeavour.
Securing The Proper Resources
Perhaps the most important thing that winning forex traders do is secure the proper resources before jumping into the market. Desire and aptitude are simply not enough to profit consistently; one must have an adequate amount of money, time and quality market access for a legitimate shot at success.
Let's take a look at the three prerequisites for profitable forex trading.
No matter what type of trader you are, a certain amount of capital will be needed to actually buy and sell currency pairs on the forex marketplace. While accounts may be opened for as little as £50, it is imperative that the balance is large enough to service the needs of a given strategy.
Having adequate capital reserves before you start trading promotes success in the following ways:
- Reduces stress as every trade doesn't need to be profitable to preserve the trading account.
- Furnishes the trader with time to build, monitor and cultivate robust strategies.
- Affords participants a higher degree of strategic freedom in regards to applied leverage.
When trading on the forex market with real money, it's important to be sufficiently capitalised for your objectives. If the monetary outlay is too small, weathering challenging market conditions becomes an epic task. According to forex brokerage insiders, accounts with balances larger than £7,600 boast profitability rates double that of average accounts. This statistic may be attributed to many factors, including increased position sizing, strategic freedom or greater trade frequency. Regardless of the reason why profitability is greater, having enough money to trade properly is an essential aspect of being a successful forex trader.
Pursuing your financial goals takes time. Aside from the active trading session, you must allocate hours for preparation, strategy building and performance evaluation. Even though alternatives such as automation and black box systems exist, even hands-off forex trading takes up a good deal of time.
Below is a quick look at the three disciplines vital to successful active forex trading and time allocations for each:
As the old saying goes, "victory loves preparation." This statement is certainly true for forex market participants. A minimum of 1-2 hours per day is required for active traders to get ready for the coming session. During this period, one has the time to apply technical analysis, review pertinent fundamentals and identify the best forex pairs for the coming session. Currency exchange rates can move fast, so it's imperative that all technical levels and market drivers are accounted for before you start trading for the day.
Active trading hours are the time of day in which retail traders buy and sell forex pairs. Due to the fact that the forex market is open 24/5, a trader is free to engage the market as much or as little as deemed fit. Accordingly, some traders prefer to trade only a few hours per day, while others approach the market as a 24-hour endeavour. The choice of how many hours to trade falls on the individual.
Regularly evaluating one's performance is the key to improvement. For active retail traders, a 30-minute evaluation period (at least) is best scheduled after every session. During this time, one is free to journal, recap forex trades and record significant events that occurred during the previous session.
In reality, the actual number of hours you need to dedicate to the markets depends upon your strategy and objectives. For instance, intraday scalping requires much more time than strategies designed for the currency-oriented retail investor. However, no matter your chosen approach, preparation, buying/selling forex pairs and performance evaluation will all take some time.
3. Market Access
There are a variety of forex trading components to optimise in order to enter and exit the market with maximum efficiency. To ensure high-quality forex market access, you need a premium brokerage service low-latency trading software and robust internet connectivity. If these inputs are lacking, the cost of slippage or abnormally wide bid/ask spreads can significantly cut into potential profits.
If you're going to compete in the forex marketplace, then it's important that your market access is strong in these three areas:
- Broker: Securing the services of a top-notch broker is vital to success. The best forex brokers are licensed, reputable, in good legal standing and have an up-to-date technological framework. Make no mistake, to be a successful trader, you need a rock-solid broker.
- Platform: The software trading platform is the forex trader's lifeline to the markets. A good platform needs to be user-friendly and fast. Unfortunately, not all trading software is equal. Before placing your forex trades, be sure that your platform is up to the task by opening a practice account or utilising a free software demo.
- Internet Connectivity: Whether you are trading via a mobile device or desktop PC, a strong internet connection is a must. To learn more about the strength of your connection, you can run regular ping tests with broker and market servers. In doing so, you can monitor internet speeds, specifically as it pertains to your ability to interact with the market.
For true forex professionals, success largely depends upon securing the above three inputs. Without enough money, a strong platform, or adequate time, earning a living from forex trading can be a monumental challenge.
Nonetheless, it remains possible to profit from currency trading without making it into a career. Many people choose to participate on a part-time basis to try to earn extra money. As long as the reduced expectations are fully addressed by a comprehensive trading plan, supplementing one's income via forex may be feasible.
Understanding The Risks Of Forex
No matter how strong one's forex signals are, there's no substitute for strong risk management. That's why the cardinal rule of profitable forex trading is this: always respect and account for risk. Staying on top of risk exposure is an elemental part of not becoming overextended and prematurely blowing out the trading account.
Profiting in forex takes time, effort and capital; if significant drawdowns are frequently taken, a trader's career becomes exponentially shorter. To illustrate this point, a Citigroup study from 2014 outlined the time that profitable forex traders typically stayed in the market on a trade-by-trade basis. Traders who consistently made money held open positions between 2-3 hours, compared to 3-5 seconds for normal retail participants.
While the study deals with short timeframes, it does show that profitable traders account for risk before entering the market. Subsequently, they have the freedom to let winning trades run and losing trades play themselves out in accordance to their adopted strategy.
So, is realising steady gains simply a matter of staying in the market for a longer period of time? Not quite. Sustaining profitability depends upon understanding where forex risk lies and how to balance it with potential rewards. Recognising how the following three elements fundamentally impact forex risk is a key part of managing exposure competently:
The availability of financial leverage is one component of forex trading that is attractive to a broad base of participants. The ability to implement degrees of leverage upwards of 200/1 gives traders an opportunity to turn small amounts of capital into much larger returns. The relationship between leverage and risk is simple—the greater the position size, the greater the assumed risk. Leverage can dramatically amplify your profits. It can also just as dramatically amplify your losses.
Applying the correct amount of leverage to the market is the single largest element of risk management. As position sizes are increased, several things happen to boost risk exposure:
- Pip Values: As a position becomes more leveraged, each point-in-percentage (PIP) becomes more valuable. For instance, the pip value of one standard lot (100,000 units) of the EUR/USD is US$10.00. This means that for every 0.0001 movement in the EUR/USD exchange rate, the trading account is credited or debited by US$10.00. Comparatively, a position size of one mini lot of EUR/USD (10,000 units) has a much smaller pip value of US$1.00. Ultimately, a trade's pip value is a crucial aspect of aligning profit target and stop-loss order locations.
- Required Margin: Forex brokers use margin requirements to safely facilitate transactions. As position size and applied leverage grows, so do margin requirements. To illustrate, assume that you are interested in trading the EUR versus the USD. Let's say that for every standard lot of EUR/USD (100,000 units), your broker assigns a 2% margin requirement to open the position. If a two, three, or four standard lot position is assumed, then the aggregate margin requirement grows to 4%, 6%, or 8%, respectively.
By far, the greatest high risk factor faced by the average retail forex trader is applying too much leverage. Greater per pip values can quickly deplete capital reserves and violate margin requirements. Under such a scenario, unwanted margin calls or position liquidations may come to pass.
Another calling card of forex trading is the inherent volatility of currency pair pricing. Essentially, forex volatility is the fluctuation of exchange rates for a given pair over a specific period. In the event that rates become volatile, the risk profile of a currency pair heightens.
Although volatility is viewed by many as a driver of opportunity, it may also wield sudden and massive account drawdowns. Forex market volatility is driven by a variety of factors, including the following:
- Unexpected breaking news items can rapidly spike short-term forex volatility. Armed conflicts, acts of terrorism and political events are a few examples of headlines that drive currency market angst.
- Scheduled economic data releases such as GDP, CPI and non-farm payrolls frequently have a significant impact on the forex market. To address such events, participants involved in intraday trading, day trading and swing trading are well-advised to reference an economic calendar on a daily basis.
- Central banking rhetoric and official policy actions are perhaps the largest drivers of currency market volatility.
Monitoring P&L With A Profit Calculator
The global currency markets are dynamic atmospheres, capable of changing directions quickly. Accordingly, the value of open positions may fluctuate rapidly, which makes staying on top of unrealised profit and loss (P&L) a necessary money management task. In doing so, you may avoid negative consequences such as premature position liquidations, margin calls and extraordinary loss.
A great way of monitoring P&L on an ongoing basis is through the use of a profit calculator. The profit calculator automatically tallies gains and losses according to a number of user parameters. Upon entering the account currency, pair, opening/closing prices and applied leverage, a trade's P&L is computed. The information may then be used to identify market entry/exit points and determine whether or not a specific trade setup is worthy of execution.
While it is true that only about 30% of forex participants make money, millions of people are still drawn to the market every year in the pursuit of their financial goals. The difference between the traders who profit and those who don't is multifaceted. Nonetheless, winning forex traders have the proper resources and an understanding of risk. Without these assets, you can have a hard time finding the consistency necessary to be potentially profitable over the long haul.
It is important to realise that forex trading is far from a "get rich quick" scheme. Making money on the forex marketplace is an involved undertaking that requires you to be informed, ultra-competitive and even-keeled in the face of adversity. If these attributes are present, then forex is a viable avenue for the pursuit of financial goals.
This article was last updated on 19th October 2021.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation of Technical Analysts. He is a full member of the Society of Technical Analysts in the United Kingdom and combined with his over 20 years of financial markets experience provides resources of a high standard and quality. Russell analyses the financial markets from both a fundamental and technical view and emphasises prudent risk management and good reward-to-risk ratios when trading.
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