You may have seen ads about forex trading and how easy it is to get involved in trading currencies using an online broker. While getting started trading forex is now easier than ever, and brokers eagerly want to attract new clients, the hard part about forex trading is making a profit on a consistent basis. But is forex trading profitable?
Trading forex profitably takes time, education, coming up with a winning strategy, sticking to it in a disciplined manner, maintaining the right trading mindset and a bit of luck. Read on to find out more about whether forex trading is profitable and how forex beginners can get started.
Simply Put: Will Forex Trading Make You Money?
The simple answer is that forex trading can make you plenty of money if you get in on the right side of the market and then take your profits in a timely manner.
Of course, you can also lose money just as easily by being on the wrong side of the market and cutting your losses or by letting a winning position turn into a losing one before you get out of it.
How the Foreign Exchange Market Works
To make a forex transaction, you agree to trade or exchange one currency for another at a particular level known as an exchange rate. Those currencies make up a currency pair, and the exchange rate of that pair fluctuates up and down depending on supply, demand and the market’s expectations of what relevant news means for that pair.
The 1st currency in a currency pair is known as the base currency, while the 2nd currency is called the counter currency. If you buy or sell a currency pair, then you respectively go long or short the base currency against the counter currency.
To forex traders, a dealing spread is the difference between the exchange rate you can buy at and the exchange rate you can sell at. The tighter that spread, the more competitive a broker is.
You can profit from a currency trade by either buying in a rising market or selling in a falling one. Fortunately for traders, many currency pairs show substantial market volatility or fluctuations. While these movements can mean profits or losses, depending on how they are positioned, it does at least provide the opportunity to make a profit if your market forecasts are typically accurate.
To make market forecasts, traders typically use 2 types of analysis. The 1st is technical analysis, which focuses on levels and movements in exchange rates and other market observables. This method seems especially useful for making short-term market forecasts.
The 2nd is fundamental analysis, which seems better for making longer-term forecasts. Fundamental analysts focus on examining news events and other information about economic and financial factors related to currencies and assessing their likely impact on the forex market.
Who Can Trade Forex?
The currency exchange or forex market used to be very exclusive. The ability to trade forex was largely accessible to major banks, corporations, fund managers and high-net-worth individuals who typically dealt in millions of dollars.
Fortunately for smaller retail traders, the rise of online forex broking over the past decade means that virtually anyone with a relatively modern computer or mobile device and access to the internet can now open up an account with an online forex broker.
This opportunity now allows virtually anyone to trade currencies in the forex market electronically via one of the many forex platforms available, with many traders choosing the popular MetaTrader platforms from MetaQuotes. Retail traders can also access competitive dealing spreads at many online brokers.
How to Profit From Forex Trading
As with trading in virtually any financial market, determining in advance what side of the forex market you should be on is the true challenge for a forex trader. You can increase your odds of determining the correct future market direction by doing a fundamental or technical analysis before entering or exiting a position.
You can also increase your chances of making money overall by taking advantage of a timely correct market call and by having the discipline to minimize your losses in case your view turns out to be wrong. Many swear by using sound money management techniques and having the right trading mindset to support profitability.
Forex Trading Strategies
Many successful strategies for trading forex exist, but not all of them are suitable for every trader. You will want to select one that best suits your particular situation, including your available time, personality type and risk tolerance. They will be covered below based on the typical time horizon involved, ranging from short to long-term.
Scalping and Day Trading
Both of these short-term trading strategies are usually followed actively during a particular trading session and generally do not involve taking overnight positions. This can be an advantage due to the reduced exposure to notable market movements while the trader is asleep or not closely focused on their trading screens.
Day traders establish positions during a particular trading session and exit them before that session ends. The forex market trades around the clock from Sunday evening to Friday afternoon EST, so you need to decide what trading session to operate in.
Scalpers are day traders who focus on taking multiple small profits on positions with an extremely short duration. They typically enter and exit trades in seconds or minutes, which is a very fast-paced activity that doesn’t suit everyone.
They usually trade while looking at price charts, need very quick reaction times, as well as tight dealing spreads and virtually instantaneous deal executions — so your choice of broker is very important. For example, a scalper might look for patterns with predictive value on very short term tick charts like the one shown below for EUR/USD to help inform their trading decisions.
Swing or Momentum Trading
Swing trading, sometimes called momentum trading, is a medium-term trading strategy that typically requires holding overnight positions. Swing traders can establish positions both in the direction of and against the underlying market trend.
This strategy generally focuses on getting into and out of trades based on technical indicators that provide a sense of market momentum and show buy and sell signals. You can use momentum indicators to identify overbought or oversold markets to sell or buy into, respectively. You could also try to buy ahead of support and sell ahead of resistance levels that appear on exchange rate charts.
Examples of popular momentum indicators could include the Moving Average Convergence Divergence (MACD) histogram or the Relative Strength Index (RSI). The 4-hour candlestick chart below shows the MACD and RSI displayed in the indicator boxes below the exchange rate for EUR/USD.
This popular longer-term forex trading strategy involves following the prevailing trend or directional movement in the market for a particular currency pair. Trend trading often involves buying on pullbacks in up trends or selling on rallies in downtrends.
Once a position is established, you could then hold it until your objective for the trend is seen or the trend shows signs of reversing. Many traders use trailing stop-loss orders to protect profits in case the trend shows a significant reversal.
Trend trading typically includes technical analysis and review charts to determine what direction the underlying trend is moving in, and then aim to trade along with it. The monthly candlestick chart below for EUR/USD shows an upward trend in progress after a significant decline.
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