As a financial trader, there are plenty of options available to you when it comes to instruments to trade. You can trade stocks, indices, commodities, and even cryptocurrencies these days. However, by far the most popular form of trading is forex trading.
Forex (FX) is the world's largest and most liquid market with an average traded value that exceeds $6.5 trillion per day. That's more than the GDP of most countries! So, you can see why forex trading is so popular, and why everyone wants a piece of the pie on top of their paystub.
What many traders often overlook, however, is the volatility of the FX market. Foreign exchange is one of the most volatile markets in the world and can offer substantial profits (or losses) in a very short space of time.
Let's explore whether or not forex trading is profitable and what you need to consider before you start trading FX.
What is Forex Trading?
Forex (FX) is as it sounds – foreign exchange, or the trading of foreign currencies. In FX, you trade one currency against another in an attempt to make a profit from the fluctuations in their values.
FX is by far the most popular form of trading because it offers traders the opportunity to make money in both rising and falling markets. This is something that is not possible with most other forms of trading.
How Does Forex Trading Work?
The FX market is a decentralized global market that operates 24 hours a day, 5 days a week. This means that you can trade currencies 24 hours a day, from Monday morning in Asia to Friday night in New York.
The market is open because there are always traders around the world who are looking to buy or sell currencies. When one trader sells a currency, another buys it. This creates a constant flow of buying and selling that drives the market prices up and down.
FX is unique because it is a "zero-sum game". This means that for every winner, there is a loser. In other words, when one trader makes more money, another trader must have lost money.
Common Opinions on Forex Trading
Since Forex trading has a trillion-dollar value daily, it's clear that many people believe it to be a highly profitable venture. After all, if it weren't, the big banks and investment firms wouldn't participate. Plus, in a world where we are surrounded by W-2 tax forms and high tax rates on income, it’s nice to be able to claim tax on all of your losses.
There are also financial experts who make their entire living off of managing hedge fund investments in the Forex market. However, this is where things grow vague and day traders and new investors often find themselves misled.
Is Forex Trading Profitable?
For investors with deep pockets, trading in the Forex market can indeed be profitable. There's a reason why some of the world's richest people got that way: they've invested in Forex, and they’ve done so responsibly.
However, for those who don't have a huge amount of start-up money, Forex trading can be a risky proposition. Inexperienced traders can quickly lose their investment if they're not careful.
Unfortunately, traders get too caught up in the potential profits and forget to consider the risks – which is why around 90 percent of Forex traders do not succeed in the long run.
Why Do Traders Fail?
There are many reasons why traders fail, some of which include:
- Unexpected fluctuations in the market. Again, the Forex market is worth trillions of dollars, so even a small movement can result in a large gain or loss.
- Failing to do one's research. Before investing in any market, it's important to know what you're doing. This includes understanding the factors that influence currency values and having a plan of action in case things go south.
- Not using stop losses. This is a technique used by many experienced traders to minimize their risk. By automatically selling a currency when it reaches a pre-determined price, traders can avoid huge losses if the market takes an unexpected turn.
- Chasing losses. When a trader experiences a loss, it can be tempting to try and make that money back by taking greater risks. This is a dangerous game to play, as it can quickly lead to bankruptcy.
- Excess leverage. Leveraging one's investments can be a profitable move, but it can also lead to greater losses if the market moves against you.
- Not having a solid trading plan. This is perhaps the most important reason why traders fail – they don't have a plan of action and they're just guessing as to what will happen next.
How to Succeed in Forex Trading
There are a few things that traders can do to improve their chances of success, including:
- Using stop losses and limit orders. As mentioned earlier, these are two essential tools that every trader should use.
- Being aware of the news. The Forex market is highly sensitive to news events, so it's important to stay up-to-date on what's happening around the world.
- Managing emotions. This is perhaps the hardest thing for traders to do, but it's essential to keep a cool head in order to make rational decisions.
- Sticking to a plan. This may sound like common sense, but it's amazing how many traders abandon their plans when things go bad.
- Using a demo account. Before investing real money in the Forex market, it's a good idea to practice using a demo account. This will help you to get a feel for the market and how it works.
- Finding a good mentor. There's no shame in admitting that you don't know everything – in fact, seeking out a mentor can be one of the smartest things that a trader can do.
By following these tips, traders can give themselves a better chance of being successful in the Forex market.
Forex trading has the potential to be incredibly profitable. However, it's important to remember that there is also risk involved, and traders can lose money if they're not careful.
By using stop losses and limit orders, being aware of the news, managing emotions, sticking to a plan, and practicing with a demo account, traders can give themselves the best chance for success.