Can You Make a Living Trading Forex?
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The forex market is the most liquid market in the world, which makes it popular with traders across the globe.
Forex also known as foreign currency exchange was once controlled by large multinational firms and investment banks, but the internet has made it possible for almost anyone to trade forex.
Since then, the high levels of liquidity, 24-hour availability and ease of access have made forex trading a popular modern way of investing or even for some a career choice.
Simply because the benefits of becoming your own boss and working at convenient times are attractive prospects for many people.
Many aspiring traders wonder whether it is possible to make a living trading forex...
The honest answer to that question is yes, it is possible to make a living from forex day trading, but the best investors have a strong strategy and understand that there is always risk involved.
Here at Trading Education, it is our aim to explain the world of trading, so budding investors have all the information they need to make educated decisions when trading.
We have compiled this short guide to help you understand whether it really is possible to make a living trading forex.
How does forex trading work?
Forex traders take advantage of the volatility in major worldwide currencies by placing well-planned trades with an aim to make a profit from the large price swings in currencies.
Traders will buy and sell currencies based on whether they think the currency will rise or fall in value.
Most day traders are highly-educated in how the system works with a large pool of capital although you don't require a large amount of capital to get started. Their experience and access to high amounts of leverage allow them to use short-term strategies to gain from small fluctuations in the liquid currencies. Every transaction involves predicting the value of one currency against another and there are 28 possible currency pairs, which involve eight major currencies. Traders will look at a variety of indicators to decide which pair to trade, from volatility behaviour patterns to economic changes and convenient timing.
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It is common for currency pairs to move between 50 and 100 pips each day, depending on the conditions in the market on the given day.
The term 'pip' refers to the fourth decimal place in a currency pair, or the second decimal place when JPY is involved. For example, if the EUR/USD moves from 1.3600 up to 1.3650 there is a 50 pip move - if you brought at the lower price you would have made a profit of 50 pips.
It is possible to purchase micro lots, mini lots and standard lots. A 50 pip move on a micro lot would only be worth $0.10, but for a standard lot the profit would be $500.00 as then each pip has a value of $10.00. Obviously, this is based on a pip value scenario where USD is involved; for other currencies the pip value will vary.
How much money is needed to start trading?
If you are interested in day trading there will always be an initial capital input, but the forex market requires the lowest levels of investment to get started. The exact amount of money required to start trading will depend on how much you are looking to earn.
Many day traders start part-time and use their profits as an extra income, as this requires a lower initial investment. This is a great way to build confidence and an understanding of the forex market. Once the mechanics of trading are understood a larger sum of money can be invested, which will lead to larger profits and the possibility of earning a full-time income.
To decide how much capital to invest it is important to calculate how much money you can afford to risk. There is a big difference between using spare capital to trade in an effort to be able to purchase luxury items and risking your life savings to pay your daily bills.
The psychological pressure is extremely high, so you will need to decide how much you can afford to invest while you perfect your trading strategy.
It is possible to begin trading with as little as £500.00, but investing more will allow you to fully benefit from large movements in the market. Having a reasonable pool of available capital will allow you to avoid risking too much on a single trade, so the risk can be spread and a larger amount of money could be made.
How do I develop a successful day trading strategy?
There are four popular strategies which forex day traders use; swing trading, arbitrage, trading news and mergers and acquisitions.
The swing trading strategy carries the highest potential reward, but there is a comparably high risk.
The arbitrage strategy is the lowest risk but is not as profitable as swing trading or following the acquisitions strategy.
In general, a successful forex day trading strategy will take into account the reward and risk ratio alongside a win rate. For example, if you trade successfully 60 out of 100 trades, your win rate will be calculated as 60 per cent. If the win rate calculated is above 50 per cent you could be making a profit, but most professional traders aim for at least 55 per cent.
The reward to risk element takes into consideration the investment which needs to be risked to achieve a certain profit level. If a trader has a win rate of 50 per cent, but only loses 10 pips on losing trades whilst gaining 15 pips on the winning trades, they will be in profit.
The most successful traders aim for a high win rate percentage, as this provides greater flexibility with the reward to risk levels. It is advisable to always keep the risk levels as low as possible, with most traders aiming for an investment risk of lower than 1 per cent. This will mean that if your account holds £4000.00, you would never lose more than £40.00 when carrying out a trade.
How much money can I make trading forex?
This is often the first question novice traders ask when researching a career as a full-time trader. In truth, there is no such thing as 'easy money'. But in the trading world, there are ways to make it easier to achieve large profits, which will make it possible to earn a living.
The experience and knowledge a trader holds will greatly assist in making a profit, but there is no way to know exactly how the market will move to be able to calculate exact profits. No matter how brilliant your trading abilities are, it is impossible to know an exact figure.
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How do I calculate potential earnings?
The potential earnings when trading forex can be estimated based on the level of capital investment, the win rate and the amount a trader is willing to risk per trade.
For example, based on the strategy outlined above, a trader which holds £5000.00 in available funds with a win rate of 55 per cent could decide to risk only 1 per cent of their capital. In this scenario, the investor could place a stop loss order 5 pips away from their entry price, with a target chosen of 8 pips away. This would provide the trader with a reward of 1.6 times greater than the risk.
A forex broker will provide leverage to the trader, which usually sits at around 30:1, although in some cases it could be up to 50:1. If the trader has £5000.00 available and the broker provides leverage of 30:1, the trader can hold positions of up to £150.00, with the risk limited to the small percentage of the original £5000.00 capital investment.
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Based on our example above, it is possible to calculate the profit potential over a month of trading. If £50.00 was risked on each trade, with a pip movement worth £10.00 and a 6 pip stop, the winning trade would be worth £80.00. Over a month it is achievable to carry out 100 trades, which includes 20 days of trading. If the win rate of 55 per cent is achieved, there are 55 successful trades which have produced £80.00 each, with a total income of £4400.00.
However, 45 trades would have been unsuccessful, with £50.00 lost on each of the trades to a total of £2250.00. Assuming there are no commissions to pay to a broker, this would produce a gross profit of £2150.00 over the course of a month.
Is it possible to predict market volatility?
Forex traders aim to make a profit from market volatility. However, predicting the market is never a certainty. For example, in January 2015 the Swiss National Bank removed the Swiss franc's cap against the euro, which had been in place for three years. This meant in just one day the Swiss franc soared to a high point of 41 per cent against the euro and 38 per cent against the U.S. dollar. The surprise move by the Swiss government impacted innumerable forex traders, with some making huge profits and others, including the brokers, left on the verge of bankruptcy.
It is worth remembering that these sudden periods of volatility are not that common, with the most substantial moves in the forex market usually sitting at movements of less than 10 per cent.
What is the risk?
As with all types of investments, there will always be a risk. The most significant factor which a trader needs to take into account is slippage. It is common in markets which move very fast for losses to occur surprisingly quickly, even when a stop loss order is in place.
Another reason why novice traders often fail is because they do not realise when they have gained a slight edge on the market, such as a small pip profit, which can quickly translate into quite substantial returns. If a trader enters the market with a small sum and does not realise when they have achieved an edge, they are likely to make trades with high levels of risk in search of a quick profit.
Even so, a trader with a well-executed strategy based on a high win rate and reward to risk ratio could quite easily earn between 5 and 15 per cent each month when using leverage. When a successful edge is combined with sound principles of trading, the profit levels can increase as the capital levels grow. This will ideally lead to trade returns which provide a liveable income.
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How should I choose a forex broker?
In the forex market, a trader will need to go through a forex broker. A foreign-exchange broker will usually operate on the over the counter (OTC) market, which is decentralised and deregulated. As there is no central clearing process and fewer rules governing the transactions, it is important to choose a reputable and reliable forex broker.
A forex broker could charge a commission and will usually increase the spread between the offer and the bid, which makes it much more difficult to trade forex profitably. The bid price is the price you will receive if you choose to sell your currency and the ask price is the price you will need to pay to buy the currency. If a broker is offering commission-free trades, they may be widening the spread on the trades to make a profit.
The broker will decide whether to offer a fixed or variable spread. If you are a trader with a variable spread during a major period of volatility in the market, the spread could adjust and you could make a much larger profit than previously anticipated. But, it is also worth noting that the volatility could also be unfavourable to your trade.
What is a typical day like for a day trader?
Although it is possible to make a living trading forex, it is also important to consider whether the working day is something which appeals.
The majority of traders who make a living from trading forex work for a large institution. This provides them with access to large amounts of capital, extensive analytical software and a direct line to a trading desk. These traders usually follow news events and arbitrage opportunities to capitalise on low-risk events before an individual day trader reacts to the opportunity.
An individual trader will usually trade their own capital but could also manage other people's investments. In most cases, they will not have access to a trading desk, but they will use their strong ties to a brokerage to gain an insight into the market.
It is tough to compete with the day traders in large institutions, simply because there is a lack of resources, so instead they must opt for trades with a higher risk. Most individual traders will analyse the market themselves and use swing trades combined with leverage to gain smaller profits on currency movements.
Both individual and institutional day traders will use multiple news sources to gain valuable information each day. News is one of the most valuable commodities and will provide traders with the majority of their trading opportunities.
It is a race each day to be one of the first to know when something major happens in the world. The majority of day traders will use a software setup which is provided by their brokerage, although those with technical experience could build their own trading platform. The best platforms will provide data feeds and real-time news updates, which will allow you to find trends and predict time frames for successful trading strategies.
All traders require a high-speed internet connection and a professional software platform. To make it easier to view multiple charts and technical indicators, it is advisable to invest in a powerful desktop computer with multiple monitors.
What personality traits make a good trader?
An effective strategy, investment capital and plenty of research all need to be supported by a strong sense of discipline. There are many day traders who end up losing their investment because they decide to make trades which do not meet their initial strategy criteria.
Usually this is because they are caught up in the moment or have already lost money and are trying to quickly gain it back. There is a well-known motto in the trading world: 'plan the trade and trade the plan', as profitable trading is impossible without discipline.
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A very important aspect of trading is the psychological stress it can cause. The key to trading with discipline is to remain unemotional about trade outcomes. When you are trading successfully the stress levels are low, but you will need to find ways to cope with the potential for sudden changes in the market.
Although it is possible to attain returns of up to 20 per cent each month, in reality, this is difficult. But with dedication and a well-executed strategy it is entirely possible to make profits of between 5 and 15 per cent every month.
Starting with under £1000.00 might not allow you to leave your full-time job immediately, but gradually building an account will see your capital pool grow, and you could eventually make a very successful living from trading.
If you would like to find out more about making a living trading forex, please take a look through our useful articles or contact our knowledgeable team.