As the world's largest financial market, the forex marketplace 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 newcomer or a longtime professional, the ultimate goal of engaging the forex marketplace is the same: sustaining consistent profitability.
So, is it possible to actually make money trading currencies on the forex marketplace? The answer is yes. Although succeeding as a forex trader is not easy, it is done every day by people from all walks of life. Given the proper resources and understanding of risk, 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 be privy to adequate venture capital, time and quality market access for a legitimate shot at potential success.
Let's take a look at the three prerequisites for potentially 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 £300, it is imperative that the balance is large enough to service the needs of a given strategy.
If the capital 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.
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.
3. Market Access
There are a variety of forex trading components that need to be optimised in order to enter and exit the market with maximum efficiency. To ensure high-quality 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.
For true forex professionals, success largely depends upon securing the above three inputs. Without enough money, low-latency access, 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
The cardinal rule of profitable forex trading is to 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 successfully 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.
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.
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 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 traders 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.
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…