Forex trading is complicated, sure, but like every other great investing market in the world, it could represent huge gains if you do it properly. As the old saying goes, no pain, no glory; knowing how to become a successful Forex trader could be the game changer in your life.
Some people prefer to invest in traditional markets such as construction or real estate, others prefer food services or even open a gas station, but there are certain kinds of people who love the adrenaline of investing his or her own money. They win, and they lose, but it is what they like. They invest in equities, commodities, and Forex.
In this article, we will talk about what you should know about the Foreign Exchange industry, how to become a day trading, what it takes to start trading currencies, how to have a profitable win/loss ratio, and finally, the basic principles to avoid Forex scams.
But first things first, let’s briefly talk about what the Forex market is.
What is Forex Trading
First, Forex is an acronym that stands for Foreign Exchange. It means that it is the market where people exchange currencies from all over the world.
Let’s say that you are currently living in Italy and have plans to go to the United States for vacation. Then, you should go to your local bank to exchange euros for dollars.
Companies do the same when they export or import products or services, among other things. A corporation that is headquartered in San Francisco and import products from China need to buy yuans, the local currency there, in order to pay the provider.
That’s Foreign Exchange, the movement of value across currencies.
In the same line, the Forex market is the place where investors speculate with the price changes of several currencies in the world and make money with the differences between valuations.
It is the largest financial market in the world, with over 5.1 trillion dollars traded per day, according to the Bank for International Settlements. Forex doesn’t have a central marketplace or power but a group of central banks that manage local currencies in every country or region.
It is possible to make money in Forex
Yes, it is. People make money in Forex all the time, every hour and every second. The Forex market is even that good that allows you to make profits in either direction when a currency is going up, but also when it is falling. The only thing you should know is the direction of the pair.
Easy, right? Well, no. Forex trading is not easy money.
Nobody knows what will happen in the future, and the same happens in Forex. No matter who tells you that he knows the grail or what will happen in the next hour, nobody, and I repeat, nobody knows the future.
What a Forex Trader does is to anticipate movements with all the information he or she can have. There is no 100% accuracy or certainty, but the more hints a Forex trader has, the more confidence he is about the trade.
The long story in short, yes, it is possible to make money in Forex, but you should learn how to trade right. As Kenny Rogers’ song The Gambler says, “If you’re gonna play the game, boy. You gotta learn to play it right.”
When it comes to talking about profitability in the Forex market, it is essential to understand the lifecycle of a typical Forex beginner. Most of the times look like the following:
1. The trader gets excited by a forex course that recalls the idea of quick money and easy living.
2. He signs up in a forex broker platform with no preliminary research.
3. The hero thing. The trader feels like he is the one who is going to change the world, one pip at a time.
4. After a couple of good trades, he falls in complacency and burns a large amount of money in a short amount of days.
5. Finally, he concludes that Forex is a scam, and no one makes money.
According to the statistics, 95% of new traders burn their accounts in less than six months, and even, a 14-year research conducted by the University of California and Peking University about traders of the Taiwan stock market found that 90% of them were gone after four years. All due to overconfidence.
The study found that people started trading in a very responsible manner. Still, they became overconfident following profitable periods and engaged in overtrading, extreme risk positions, and lack of research. So they got burned.
Forex trading is undoubtedly profitable and you can make a bunch of money. However, you should have your trading plan, constant research, and look for a personal strategy that matches your needs and targets.
How to make money trading Forex
Forex traders make money with the price differences between the opening and closing prices of their positions. As Commander in Pips states in his lesson about the trading object in the Forex market, “the exchange rate of one currency to another reflects the relative power, condition and perspectives of that country’s economy, compared to other one.”
So, the idea is to buy low and sell high or sell high and buy low. It looks the same but it is not. In the case you do think both are the same situation, it may help if we talk about long and short positions.
Remember, traders don’t make money; they do pips. Profits are the result of the pips after being multiplied by the size of the position.
How to make money when buying currencies:
When a Forex trader thinks that a currency will increase its value, he usually buys the money with the hope it will sell it more expensive later.
Let’s take the EUR/USD as an example. Imagine that interest rate differentials between the United States and the eurozone are favorable for the US, and instance, the USD. However, after an economic problem, the Federal Reserve decides to cut rates by half-point, sending the dollar down. If the euro remains with the same interest rate from the ECB, it would be logical to think that the EUR/USD will rise as the dollar will lose steam, while the euro remains pretty much the same.
At that moment, as a trader, you decide to open a buying position in the EUR/USD at 1.1000. You will make money if the EUR/USD goes up, and your profit will be the difference between your opening and closing prices. In the case that you decide to close your position when the euro is at 1.1200 against the US dollar, your profit will be 200 pips because you buy the euro cheaper and sell it more expensive.
However, if your hypothesis is proven wrong and the EUR/USD goes down, then you will be forced to close your position with negative performance. Again, your loss will be the difference between the opening and closing prices. In this framework, if the EUR/USD falls to 1.0900, you will lose 100 pips.
How to make money when selling currencies:
On the other hand, you can make money going short in a pair, meaning that you sell a cross with the speculation that the price will go down. When you sell the euro against the dollar at 1.1000, you will make money if the EUR/USD goes to 1.0900, for example, but your position will be negative in any case the rate of the pair goes above 1.1000.
Carry trade; the rollover power
Another option to make money in Forex is to buy a pair where the base currency has a positive rate differential against the quote currency. Every night you will earn money based on the carry trade and the net interest return on the position.
Positions that are kept open after 9 PM UTC are considered overnight, so your broker will pay you a bit of money for the interest rate differential. It is called the Rollover rate in Forex.
The rollover rate is the net interest return that you earn with every overnight position. It is calculated by subtracting the interest rate of the base currency from the one in the quote currency. Then, you should divide the result by 365 times (as days in the year) the base exchange rate.
That being said, remember that positive rate differentials will provide you money, but in negative interest rate differentials, you will owe money to the broker. Think about that as a dividend from a company share, you will get money when you have a good quarter, but your position will be depreciated when it produces negative revenues.
How to become a Forex trader, a successful one
Forex trading is a risky game, a profitable but stressful and not easy job. In case you are willing to take the risk and test you as a Forex trader, excellent decision, but it is good to understand that a buck made by a Forex trader is a hard buck done.
Before investing your money in Forex Trading, it is essential to understand the risk of trading capital and that no profits are guaranteed, never. Also, please do your research about Forex, how it works, what its synergies are. The strategies that fit with you and how much capital you can invest. Long story, in short, educate yourself.
Open an account in a reputable broker: In the FX market are both important to have the right strategies but also to trade in a reliable, safe, and full of features platform backed by a regulated broker. Do your homework and research about the brokers you are interested in. That’s the best answer on how to avoid Forex Trading scams.
Try a demo account: Never go live right away. It is good to train yourself for at least six months. Understand the market, define your favorite assets and pairs, what are the strategies that better suit your necessities and life conditions.
Fund your account with money you don’t need for living. It is a good practice to set an amount of cash for your investment projects and let them work. Please don’t use your day-to-day money as it will add pressure to your psychology in Forex.
Start small: Don’t try to get rich on your first day. Forex can change your life, but one pip at a time. Know your limitations and build your portfolio step by step. Don’t get hijacked by greed or fears.
Learn how to manage risk and to keep alive: Trading is risky, so trade responsible, never invest more than 10% of your account in a single trade. The market will be there tomorrow, be sure your account will be too; risk management will help you on that.
Keep learning: Forex evolves every day with new tools, new robots, and algos that can define the way of trade and the interaction between currencies. Keep in mind that what works today, maybe can not do it tomorrow. So, keep learning and be on top of the latest trends.
Follow your trading plan: After doing your research and decide to go live. It is important to understand that you need to be confident in your trading plan. Set entry and exit points, but also potential profit targets and stop losses as part of your trading plan and follow it. Be disciplined.
Cut your losses: Top traders always follow their trading plan strictly. They add profit targets but also stop losses, and usually never change stop losses. It is always critical to have an exit when the trade goes wrong.
Let your wins run: It is vital to follow your trading plan and set profit targets; however, it is also a good practice to evaluate your trade when it goes according to your research, and you have enough gains. Do another study about the position, protect your profits with trailing stops, and keep your winning trade alive.
Study: Again, training is one of the secrets for the most successful traders in the world. You should be willing to do your research before every single position. Forex changes every day.