How do Forex Traders make money?
The million-dollar question (literally!) – Can forex trading make you rich? Yes and No.
Here is why
Many retail traders turn to forex in search of fast profits and untold riches but statistics show that most aspiring forex traders fail, some losing large amounts of money. But more about this later. Let’s first take a look at some “need to know” information.
What is Forex and how does it work?
Forex is where the world governments, international banks and traders trade currencies. Traders are going to need four things to start:
- A Forex broker – which will later be explained in full.
- A Forex terminal or better known as the software which allows trader to communicate trades to their broker.
- A trading strategy which is a basic set of rules to follow when trading.
- A computer or a mobile phone with internet access.
What are the Major Currencies?
A traders best bet when it comes to Forex trading is major currencies which have very small spreads and offer great trading conditions.
The major currencies are:
- US Dollar (USD)
- Euro (EUR)
- British Pound (GBP)
- Canadian Dollar (CAD)
- Japanese Yen (JPY)
There are other currency pairs that don’t involve USD at first glance — like GBP/JPY. But they have higher spreads and volatility than major currencies.
How to pick a Forex trading strategy
A trading strategy is a set of rules a trader has to follow to succeed on the Forex market. It can commonly be defined as a set of market conditions and corresponding trades a trader needs to do to make money off them. The best Forex strategy for beginners is Price Action. There are other trading strategies that are no less viable — like scalping. Proper scalping is a complicated task though, and the risk of making a mistake is extremely high.
What is a Forex Broker?
Anyone can indeed trade on Forex, but it can only be done through mediators called brokers. Basically, a broker is a traders’ “hands” on Forex which provides them with access to the market.
But getting back to the question at hand –
Leverage is a two-edged sword and can lead to massive profits but also substantial losses. Factors like platform malfunctions, and sudden bursts of volatility will pose challenges to would-be forex traders and unlike stocks and futures that trade on exchanges, forex pairs trade in the over-the-counter market with no central clearing firm. Contrary to what traders may read on many websites across the web, Forex trading is not going to transform a $10,000 account into $1 million gold mine. The amount a trader can earn is determined more by the amount of money that they are willing to risk rather than how good their trading strategy is. When it comes to Forex Trading the old saying “It takes money to make money” rings true.
This does not mean that Forex is not a worthwhile endeavour – after all, there are a multitude of successful Forex traders who trade for a living. The difference is that these traders have slowly developed over time. None of these traders took on the market thinking that it would be a quick cash option.
The Basics of Making Money Through Forex Trading
Trading in foreign currencies on the foreign exchange market is very popular amongst people who are looking for low capital trading. There is no need for traders to make a massive investment in order to get started. It’s also offers unparaled convenience because a Forex trading day lasts for 24 hours but there are no trades made during weekends.
Typically, Forex beginners get excited by a course which promises them quick money and a new, comfortable lifestyle and sign up with a Forex broker without doing any further research. What’s not to be trusted right? (wrong!) After signing on the dotted line, they go through a large amount of money in a short amount of days, concludes Forex is a scam, and makes no money.
And what about the Top of the crop when it comes to Forex Traders? They make use of tried and true systems that has been slowly developed and learned through trial and error. This method allows them to make consistent profits on them daily. Keep in mind, even top performers experience slippage at some point as currency markets are fast-moving. “Slippage” is what happens when losses are more substantial than expected.
The difference between successful and successful traders is exactly the same as what separates any successful and unsuccessful person. Traders who are ultimately successful have typically, at the end of the day, tried a million things and lost a lot of money and time in the process. The only way to discover if something is profitable is by trying things continuously until something works.
How to Start in Forex?
Begin by reading books as they teach the theory behind trading in financial markets, which is key to successful long-term trading. Secondly, join every Facebook group or Twitter trend that talks about Forex and ask questions. Understand that leverage can be a double-edged sword and using excessive leverage can damage an otherwise successful Forex trading strategy.
Traders must remain realistic about expectations of the return on investment and also learn how to use a “stop-loss order”, which is essential to risk management. Finally, find trustworthy people and ask them for reputable brokers and courses to take and follow. This is one of the most important keys as there are probably hundreds of Forex courses online that guarantee traders a system that will make them large amounts of money from day one and as with anything, a lot of them are scams.
Forex Trading: Demo Account vs. Real-Money Trading Account
After a trader has done their reading, watched relevant videos, asked multiple questions, and got the answers they can open a demo account and put their knowledge to the test. A demo account is a practice account where traders can trade with pretend money which is the first obvious benefit. If a trader should slip up, they won’t incur an actual loss.
Other advantages include:
- Watch the Forex market move in real-time.
- Learn the industry jargon and how trading platforms
- Test out knowledge and test theories.
- Try different currency pairs.
- Compare various trading platforms.
Traders should opt for reputable and secure brokers, that also let them open demo accounts with real-time market data.
Technical Analysis vs. Fundamental Analysis
Just like when trading stocks, currency trading gets more precise when a trader knows how to read charts. It might not be the most exciting part of trading but going through numbers is key to a successful trade. Without it, it is basically a gamble. Traders will go through technical and fundamental analysis upon which they base their trading strategy.
To do technical analysis, traders would look at the past performance of the exchange rate of currency pairs. Technical analysis is what are typically seen in movies about stock traders where they look at lines that go up and down. The lines are the market fluctuation, and the purpose of technical analysis is to predict where the market will go based on past performance.
Fundamental analysis is an analysis of a country’s performance economy wise as shown by economic data such as GDP, employment, and inflation. Other indicators will come into play such as government stability, and the country’s international political and trade relations. The fundamental analysis approach attempts to predict a country’s currency value by assessing the country’s wellbeing.
It is best to learn both methods.
How to Make Money with Forex Fast?
The first questions a new FX Trader tend to ask is, “How much money will I make from the Forex market?” and “How to make money fast on Forex?”. It is indeed possible to make money trading Forex and plenty of people manage to make a consistent income trading Forex daily.
But it is a false statement that Forex is easy money. Typically, when a trader signs up to start trading Forex, they do so under the false illusion that it is indeed an easy way to make money. They are sold on expensive courses that feature wealthy millionaires with fancy cars and in their yachts talking about how they do no work but make lots of money by doing as little as possible.
In Truth – it is highly unlikely that those millionaires didn’t put hard work in at some point or hadn’t lost a huge amount of money when they starting trading Forex and learning how to be successful.
Forex traders really do make money, but they also lose money and it all comes down to mindset. Those who make money understand Forex is a business and a hard one at that.
Types of Successful Traders
There are two general types of traders:
- Those who trade on behalf of clients
- Those who trade on a personal account
Traders who work for financial institutions or brokers buy and sell shares on behalf of the brokerage’s clients, and not with their own money. What this means that rather than making a profit or a loss on the trading itself, they earn a salary as a trader.
Those who trade on their own personal account will be using their own money to earn profit for themselves on each individual trade, and not through a salary.
How to Become a Trader: Defining Success
Now that we understand what a trader is the next question is – how to become a trader? Better yet, how to become a successful trader? The first thing that a trader needs to do when it comes to trading Forex is to understand what they want to achieve through trading, and how they define success.
What does a trader want to achieve?
This is a popular topic discussed in detail in many a free webinar on becoming a successful trader.
In deciding what they want a trader needs to be realistic. They should set themselves a realistic goal, for instance – achieve 10% annual return on investment, earn 4000 USD of profit, get a total of 100 pips per month for example. Whatever a trader decides, the goal should always be easy to measure. It is also important to set a goal that can be achieved over a long-time frame. It is recommended that traders set an annual goal to achieve rather than a monthly goal.
Once a trader has set their main trading goal for the year, it is time to start learning how to achieve it. The best way is to identify which resources are available including the size of their deposit, the amount of time they are willing to spend on trading, and the amount of available funds they are willing to spend on trading-related matters. Once they have a clear vision, it is time for an action plan. This action plan should include the currency pairs they are planning to trade and the number of trades they are going to commit to.
This can all feel very overwhelming for new traders, so top tips to help traders become successful.
Professional Forex Trading Tips
Tip 1 – Develop a trading strategy
The most significant step in preparing and protecting long-term participation in the Forex market is to build a personal trading strategy and to stick to it. Once a trader feels confident that they have done enough research on the instruments and technical aspects, and has a good feel for the market with a demo account, plus defined a realistic risk profile, it’s time to develop a strategy.
Whether a trader chooses to be a forex scalper or long-term investor, the point of a strategy is to develop consistency and routine – and of course practice makes perfect. The deeper a traders’ knowledge and experience with an instrument or technique, the more they will be able to make more consistently successful decisions. As a trader grows, their strategy will grow with them.
Tip 2 – Do not overtrade on a demo account
Many people want to become Forex traders, but most never move beyond trading on a demo account. To become a successful trader, trades should consistently be making money and the only way to do so is if a trader is trading with real money on a live account. It is vital to switch to a live trading account as soon as a trader is ready to do so. If a trader is going to use a demo account, their goal should be to use the demo account to learn with the intention of switching to a live account once they have a better understanding on how to trade.
For new traders who are consistently trading by using their demo accounts, a month should be enough time to understand the mechanics of the trading platform and to start professional trading. Traders shouldn’t postpone live trading for more than three months after they have started trading on a demo account.
Tip 3 – How to Become a Successful Trader in Forex
Finally, once a Forex trading strategy has been established and switched to a live trading account, traders should move on to the next steps:
- Develop a trading plan and always adhere to it.
- Set stop-losses for every trade.
- Don’t risk more than 2% of a margin per single trade.
- Keep emotions separate from trading.
- Never trade to compensate for losses.
- Only trade when the moment feels right.
- Don’t be afraid of losses.
- Try to achieve more profitable trades.
This is an overview of the right path to follow in order to become a good and profitable Forex trader. Traders will face a lot of losses and stress along the way, but the key is not to give up. With effort and passion, traders can make up for any loss they may occur. Problems will arise if new traders become obsessed with chasing riches, and this anxiety can lead to making mistakes which in turn can and will cause losses. Forget unrealistic goals and objectives and earning money in Forex with a few quick trades is extremely unlikely. Traders who go into the trade in a risky and overconfident manner can lead them to lose their initial investment. By setting a high profit objective, traders will create great emotional pressure on themselves, which could result in one of the biggest errors made when trying to become traders.
Keep this thought in mind: “Earn the money you need and don’t stress about earning more.”