Is forex trading profitable? There is no easy way to say a firm ‘Yes’ or ‘No’. The best answer should probably sound like ‘It depends’. Let’s consider what contributes to forex trading success.
3 major factors to consider when trading forex
The forex market accounts for almost $5 trillion in volume on a daily basis. As a market, forex has its own inherent risks, with potential for both losses and profits. In order to increase your chances of making money when trading forex, you should learn how to mitigate the risks, understand the market and what drives it.
The three major things to consider in the first place:
Risk management. There won’t be profits without losses. Prepare yourself to handle the risks and consider implementing an effective risk management strategy while trading.
Portfolio diversification. Remember that forex is not the only market you can trade. In a perfect world, forex shouldn’t exceed more than 20% of your investment portfolio. Having other types of investments in play, you diversify your portfolio and reduce potential losses.
Trading strategy. Successful forex trading requires, of course, a profitable trading strategy. There is no one perfect strategy that will work every time for every market. One strategy might work well for a certain currency pair, and be absolutely unsuitable for another.
Profitable forex trading and your success as a trader greatly depends on a high level of discipline. A well-thought-out strategy will always help you to avoid emotional trading and behavioral biases, and enable you to stay focused.
How to profit from forex trading: limit your risks and keep your emotions grounded
In general, to profit from trading forex, you need to buy low and sell high. Though this principle seems very simple, it’s not so easy in practice.
That’s why it’s vitally important to adhere to the basic and the most important principles of forex trading and trading psychology.
Use a stop-loss religiously. No matter what. A stop-loss should be always set, regardless of any trading strategy you choose. By pre-defining the closing price of your trade, you protect yourself from a great deal of uncertainty and eliminate the risk of losing more money than expected.
Keep your emotions grounded. The author of “The Intelligent Investor” Benjamin Graham once said, “the investor’s chief problem – even his worst enemy – is likely to be himself”. Some investors see trading as a game. Trying to beat the market, they inevitably start losing at it. However, trading has never been a game. Moreover, this experience lies somewhere at the junction of discipline and analysis. Emotions spoil everything. There is no sense in getting angry at the market, or worrying about your losing positions for too long. Tracking your performance and adhering to your own trading rules is your way to success on the forex market.
Keep up-to-date with the current forex market news. Always stay tuned and follow the latest forex market updates. Major announcements, news and events are the key market drivers. Therefore, it could help if you pay special attention to the fundamental events that might affect the forex market.
How to choose what and when to trade
Time to trade
Trading is all about the right timing. Trading conditions can greatly vary during any given week. You should know that the days of important news releases and market opening times are considered highly volatile and incredibly risky.
Currency pair to trade
Sometimes, choosing a pair to trade may become the hardest decision. You should remember that there are 3 major forex pair groups: majors, minors and the exotics.
Major currency pairs are the most frequently traded couples on forex market. They usually provide the lowest spread and are the lost liquid. Also, they always have the US dollar, either on the base, or on the quote side. The EUR/USD is considered the most-traded forex pair, comprising almost 30% of the overall daily FX market volume. The major currency pairs are the following:
Pair | Countries |
EUR/USD | Euro Zone/United States |
USD/JPY | United States/Japan |
GBP/USD | United Kingdom/United States |
USD/CAD | United States/Canada |
USD/CHF | United States/Switzerland |
AUD/USD | Australia/United States |
NZD/USD | New Zealand/United States |
Minor currency pairs, or cross-currency pairs, do not include the USD and are often referred to as “crosses”. With the advent of currency crosses, there is no need to convert the currency into the US dollar. Today, brokers offer direct exchange rates. The most active crosses are derived from the 3 major currencies after the USD – the Euro, the British pound and the Japanese Yen. The minor currency pairs are the following:
Pair | Countries |
EUR/GBP | Euro Zone/United Kingdom |
EUR/CHF | Euro Zone/Switzerland |
EUR/CAD | Euro Zone/Canada |
EUR/AUD | Euro Zone/Australia |
EUR/NZD | Euro Zone/New Zealand |
EUR/JPY | Euro Zone/Japan |
GBP/JPY | United Kingdom/Japan |
CHF/JPY | Switzerland/Japan |
CAD/JPY | Canada/Japan |
AUD/JPY | Australia/Japan |
NZD/JPY | New Zealand/Japan |
GBP/CHF | United Kingdom/Switzerland |
GBP/AUD | United Kingdom/Australia |
GBP/CAD | United Kingdom/Canada |
Exotic currency pairs consist of one of the major currencies paired with the currency of an emerging or a strong but smaller economy, such as Singapore, Hong Kong and countries outside the European Union. These pairs are traded less often than majors and minors due to a potential lack of liquidity. Examples of the exotic currency pairs are the following:
Pair | Countries |
EUR/TRY | Euro/Turkish Lira |
USD/SEK | US Dollar/Swedish Krona |
USD/NOK | US Dollar/Norwegian Krone |
USD/DKK | US Dollar/Danish Krone |
USD/ZAR | US Dollar/South African Rand |
USD/HKD | US Dollar/Hong Kong Dollar |
USD/SGD | US Dollar/Singapore Dollar |
Trading volume
How profitable is forex trading? When calculating potential returns, trading volume is the #1 factor. The higher the trading size, the greater the profit or loss as the price moves. Besides, forex trading is highly leveraged – it means that the size of your trades can become much larger than your initial deposit. Some forex brokers provide up to 50:1 leverage (with even more in some countries). Trading more than you have could eventually multiply your profits, but also augment your losses.
The majority of traders would agree that opening a series of modest trades, instead of a big one, is a safer strategy to increase trading volume. The “never put all your eggs in one basket” principle is a common trading practice, which helps to diversify your portfolio and reduce the level of risk.
Is forex trading profitable?
Forex trading, like other types of trading, CAN be profitable. Still, it never gives you any guarantees. Just because a certain trading strategy worked out once and made a fortune for some lucky guy, doesn’t mean it will work the same for you. Is forex trading profitable? It certainly can be for those of you who are ready to invest heavily in education first.
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2019-07-01 14:46:45Z
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