How To Make Money Trading Forex - A Beginner’s Guide
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To put it simply, the basis of making money trading forex sounds relatively easy: when the price is low, buy; when the price is high, sell.
However, supposedly up to 96% of traders lose money and end up quitting altogether. Conversely, other sources have suggested that actually, traders win more trades than they lose, but often their losses are larger than their gains.
So, making money trading forex can be… let’s say… complicated.
It really requires a mixture of the following:
- Patience. You need to be patient to learn and patient to earn.
- Understand forex. You need to know the ins and outs of the forex market.
- Understand risk management. You won’t make money if you’re part of that 96%!
- The ability to strategise. You need a plan if you want to be profitable.
If you don’t have any of those and do not have the time to invest in them, trading forex might not be for you.
If you’re an absolute newbie, then it is highly likely that you don’t know what forex even is.
In that case, we should start from the very beginning.
The forex market shifts $5 trillion a day between traders, buying and selling currency pairs and is the largest market in the world.
A currency pair is the rate of exchange between two countries' currencies.
For example, at the time of writing this article, the exchange between the EUR (Euro) and USD (United States Dollar), which would be displayed as EUR/USD, was 1.1252.
That means that for one Euro, you could buy 1.1252 of USD.
These rates are constantly changing, in most cases the last two digits, up and down. We call this fluctuation in price liquidity.
Traders are looking for opportunities to buy one currency at a low rate and then sell it for a higher rate.
That is basically how you trade forex.
How much money do I need?
Forex trading is a good choice for many traders because it requires less capital than other forms of trading/investing, such as stocks.
This is because of the way currencies are broken down. Most, with the exception of USD/JPY (United States Dollar/Japanese Yen), are broken down to the fourth decimal, which is called a pip.
Most financial instruments cannot be broken down to such small figures.
Even if you’d actually prefer to trade stocks or another instrument, forex is a good place to start and help you understand the fundamentals of trading and potentially gain some capital.
Technically, you’ll need enough money to open a trading account, which can vary quite significantly depending on different brokers. Some brokers don’t require a minimum deposit, while others may require as much as £500 or more.
With the money you have used to open your account, it is best that you only risk about 1% on any trade. That money can go very, very quickly.
Remember, at the very beginning, it is more important to learn how to trade than to make a profit. If you lost money, investigate how it happened and make sure you don’t make the same mistake twice.
If you found this article by Googling ‘How to make money with forex’ or anything like that, you are 100% not ready to start using leverage. Leverage is something you should leave until much later.
Likewise, you should keep in mind that big profits often require big investments.
You also need to think about fees as well. Unfortunately, that nice little profit you make when you trade might not be the entire sum of money you’ll actually make.
Though most forex brokers will not charge a commission on your trades, some might. There are also specific fees to bear in mind as well, such as swap fees, which are what brokers charge you for holding a position overnight.
Luckily, if you’re from the UK, you won’t have to pay tax on your earnings from forex trading. However, if you’re based in another country, you should check what the tax laws are on income gained from forex trading.
How much time do I need?
Before we talk about how long it will take for you to be ready to start trading and making money, we need to talk about having the right mindset.
Look at trading as a ‘business’ not a quick way to make money. No business is immediately profitable, especially if they are still learning when they start operating.
The best businesses need to have a business plan and that plan can take time to develop.
Persistence is key. Some traders only really start to make money after three to five years.
The real question is: How much time do you have? If you have a full-time job and other commitments, these, of course, will come first. You need to be honest with yourself about the amount of time you can devote to learning.
After learning to trade, finally, you can start practising.
Be mindful that not only might you sometimes lose money, you sometimes might not be able to find an appropriate opportunity to trade at all.
How much money can I make?
Probably more than your savings account does, that’s for sure!
Look, you’re not going to become a millionaire overnight. Unfortunately, that’s something all forex traders need to accept.
As you would with a salary, you need to look at your profits over a long period of time, such as a month or a year.
As we said earlier, when you start trading, you should ideally be risking only 1% of your account per trade.
You need to think about how many pips you’ll gain on each trade.
To be honest, this is something you will need to figure out for yourself. Though most beginners will look to gain around 10 to 15 pips per trade as practice.
However, as you acquire more experience, such gains will not be worth your time. In fact, it is highly advised that you don’t waste your time agonising over such gains and instead look for larger, less time-consuming, profits.
For many traders, making between 50% and 55% is considered successful and profitable. Over time that small percentage builds up.
Win more than you lose. But don’t chase those losses!
Where can I make money trading forex?
Retail forex traders make trades via a broker in the form of a CFD (Contract For Difference).
Now, your mental image of a broker shouldn’t be of a guy in a suit, sitting at a desk and waiting for you to call him. We live in the 21st century after all.
Practically all brokers operate online. They utilise high-powered data connections to push through your order to an exchange where it will be fulfilled.
You place these buy and sell orders through a platform which can either be web-based, which is very popular these days, an application on your desktop or smartphone, such as MT4, MT5, cTrader, and some brokers can even enable you to make trades via a smartwatch.
There are numerous exchanges covering different time zones around the world. These exchanges allow us to trade forex, 24 hours a day, from Sunday 6 pm till Friday 5 pm, EST (United States Eastern Standard time).
Not all brokers are the same. In fact, they can operate in very different ways.
There are two primary types of brokers: dealing desk, which is often referred to as a market maker and non-dealing desk, which can be either STP (Straight Through Processing) or ECN (Electronic Communication Network), and there are also DMA (Direct Market Access) brokers.
In most cases though, brokers will offer a mixture of the above, in the form of different account types.
While it may sound appealing to use a broker with more direct access to the forex market, choosing a broker should really be down to your preferences.
Strategy, strategy, strategy
Strategies are how you make your money.
Without a strategy, you can’t really say you are even trading. You may as well be gambling at a roulette table.
You can’t rely on just one strategy. In fact, many of them can only be used in certain circumstances, depending on the direction the market is heading. For example, trending upwards, trending downwards, or simply ranging.
You need to assess the market before setting up a strategy. Then, when you are able to confirm a change has emerged in the market, you need to put your strategy into action.
Strategies are also much more effective at making big gains. Without a strategy, you cannot expect to make large gains at all.
Popular trading strategies seek to make a profit from the changes and abnormalities of the market.
Another important part of strategising is that they can also be used to mitigate risks, which brings us to the next section...
Let’s talk about risk
This should always be at the front of your mind. It’s very natural to think about the rewards of successful trading, but we also need to plan for our losses as well.
We need to think about what we might lose should our plans fall short or even fail completely.
In forex trading, you can’t afford to not be prepared. Nothing should catch you by surprise.
This where we get to risk management.
To understand it, we need to understand our risk-reward ratio. In other words, how much are you willing to risk in order to get a reward?
Ideally, your risk should be low and your reward should be large, or at least larger than your risk. The further apart the two numbers are the better.
It really is possible to lose everything trading forex if you don’t understand the risks involved.
One of the best ways to prevent big losses is by using stop-losses and take-profit orders. These are orders you place on your trading platform that automatically exit a position when the price reaches a certain point.
Think of such orders as an insurance policy.
If you remember anything from this article, make sure it’s these key points:
- You can make a profit if your wins are higher than your losses. 50-55% is successful and sustainable for most traders.
- Strategising is how you make your money trading forex. Don’t start trading without a plan and an idea of how to make money in different scenarios.
- Risk management can stop you from losing everything. With every trade, you should know how much you are willing to lose.
Getting an education
Wow, there cowboy! Were you just thinking of jumping right into forex trading after reading one little article? While we are flattered that we managed to convince you to get into forex trading, one article is not enough to start!
You need to educate yourself.
Before anything in this article is of any use to you, you need to know the basics.
With our course you will learn the following:
- Foundation In Forex Trading
- Mechanics Of Forex Trading
- Advanced Analysis in Forex
- Popular Trading Strategies In Forex
Only when you understand the above will you really be able to make money trading forex.
Our forex trading education would normally cost you £2,500, but luckily for you, our partners are paying for it instead.