Trading various assets online is growing more and more popular, and everyone with a bit of cash to spare is interested in becoming a trader. However, people often have high expectations of what these trades can bring them, often hearing stories of large profits, which were likely what brought them in the first place.
Let's take forex, as an example.
The forex market trades around $5 trillion in volume every single day. This is an incomprehensible amount of money for most of us, but the fact is that huge amounts are exchanging hands, and that money has to go somewhere.
In other words, there must be a lot of profit to be made.
So, with that in mind, why doesn't the question 'Is forex trading profitable?' have a clear and sound "YES" as its answer? Why is the question so debatable, and why isn't everyone a millionaire?
The answer is actually rather simple. Most people rush head-on into forex trading, without any idea about what they are doing. In doing so, they risk their funds, and eventually lose them. Since this happens to a large majority of those who try it, the overall impression of forex trading's ability to earn money is flawed, and people have started doubting it.
Can you make money by trading forex?
Forex trading is one of the sectors where the largest amount of money gets to circulate every single day. As such, it can be very profitable, and it is possible to make money by participating. However, it all depends on your approach, which means that we have to change our original question.
It is not whether or not forex is profitable — we know that it is. The real question is HOW to trade it profitably.
Forex trading has its risks, and there is as much possibility for profit as there is for loss. It all depends on whether you know what you are doing or not. Whether you have a strategy, or if you are just randomly making moves, hoping for something beneficial to happen.
Trading forex is not exactly like trading other assets where you can actually make predictions based on expectations and evidence, and most of it will usually only depend on timely reactions as things happen.
Even so, there are some strategies, preparations you should take, and things to keep in mind that you should know, so let's talk about some of them.
What do you need to know to trade forex successfully?
1) Decide if this is the thing you want to do
Forex trading is a good way to make a profit for some people. However, that doesn't mean that everyone will find themselves in it, or that they have to.
Trading foreign currencies is often a fast game, and if you can't afford to keep an eye on the market, and you don't trust trading bots and brokers, there likely isn't much sense in choosing forex. For such people, a long-term stock investment might be a much better approach.
2) Learn how the market works
If you decide that forex trading is, indeed, your call, the next thing you need to do is do some studying. A fair amount of it, actually. You need to learn how the market works, at the very least the basics of it. Also, if, along the way, you find something that is a part of forex trading, and that you are not comfortable with it, it is best to not get involved. Just don't trade, and find something else to explore.
If, on the other hand, you like what you learn as you are researching the topic, then, by all means, proceed.
3) Never trade the money you can't afford to lose
This should be a given, but so many people tend to go all-in, which is a major mistake. The market situation can change relatively quickly, and if you have invested everything, you can also easily lose everything.
The bottom line is that you should never trade money that you aren't comfortable with losing. In other words, approach every trade as if the odds are against you. That way, if you actually do lose it, you will not be left without a dime.
4) Come up with a trading strategy
As mentioned before, you cannot trade forex successfully by just making random moves. Instead, you will have to employ a definite strategy. Of course, there is still no good or bad approach, no right or wrong way to trade.
However, it is important to choose an approach and stick to it. Different strategies work well for different currency pairs, but they won't be that great for others.
You also need to train yourself to be more disciplined, keep your focus, and not give in to your emotions, which is very difficult to do sometimes. This is why emotional trading is one of the greatest dangers for traders, as it gets to them without them even be ing aware of it until it is too late.
As you gather experience, your trading strategy will evolve, and you will find ways to get better outcomes from your actions. You will learn how to make subtle changes to your approach, and those changes could have a big impact on how things play out.
A good way to start is to test your trading strategy on a Demo account. Many forex exchanges offer Demo accounts, as they can be rather useful for new traders to get started. In fact, even professionals use them from time to time, if they have to test out the impact of a new strategy, or if they are making changes to an existing one.
But, once you figure out your approach and have a good plan, you will be much closer to actually making a profit out of forex.
5) How to make a profit by trading forex?
Finally, we come to the big question, which is how to actually make a profit. Well, the answer is, actually, rather simple. There is no big secret or a strategy passed down in secret through generations. Simply buy low and sell high, and then repeat until you have more money than what you started with.
That's it, and this simplicity is actually what a lot of people prefer when it comes to forex trading. Even better, you can always simply buy and sell the assets without having to actually own them.
Of course, it all sounds very easy when said like this, but it's not. If it were, everyone would be making a lot of money. In reality, however, most people lose it. The explanation given here is the gist of it, though. However, it is not all there is to know, and there are even more things that you should keep in mind along the way.
These are the things, the nuances, that make forex trading more complex. But, they also protect your money, and they increase your odds of actually earning something. For example:
6) Always use Stop-loss
If you have done some research already, you likely know what a stop-loss is. If not, maybe you have at least heard of it. Stop-loss is a must-have, regardless of your strategy or approach. It is a parameter that will allow you to define the trade's closing price.
In other words, you pick the price of the asset, and if the actual price ever reaches the one you selected, the trade would be over automatically. This is a good way to protect your funds without having to constantly keep an eye on market movement, since that is, of course, impossible.
Of course, the price of assets is volatile, and it will always go up and down. It doesn't mean that you should sell everything the moment it starts going down. But, having a safety level that is at the edge of the drop you are comfortable with as a precaution is a good thing to have.
7) Trade without emotions
We spoke about this recently, but trading without emotions is the only way to keep things under control. If you start trading because you think you see an approaching opportunity, but there are no technical indicators to confirm it, you will likely lose your funds.
Some talented traders with years of experience and expert knowledge of the market may be able to do it, but for the rest of us, it is best to play it safe. Do not rush into trades if there is no reason to do it,
Wait for the signals to happen before you enter the trade, and start buying or selling. Doing so before the signal will likely result in a wrong move. And finally:
8) Keep track of current market events and issues
The trading world is alive, and there is always something going on that is gently or strongly influencing the forex sector, the stock market, or any other part of the trading world.
With experience and spending some time of paying close attention, you will be able to see subtle or not-so-subtle shifts in prices that take place after every news story. In time, you will learn what to expect from what kind of news, how the market will react, and therefore, how you should react.
It will all happen as you sharpen your senses and improve your approach, strategy, and alike. Until then, don't take any risks, approach carefully, and always keep an eye out for great opportunities.
Author: Ali Raza - A journalist, with experience in web journalism and marketing. Ali holds a master's degree in finance and writes extensively about the financial markets and fin-tech industries.
