Is Forex trading profitable? Well, Forex trading has a lot of potentials if you know what you are doing. But at times, it may seem like a double-edged sword. So let’s glance at some aspects of Forex trading, like what is it and how it works.
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What is Forex?
Forex is a short title for foreign exchange. Foreign exchange marketing is the transaction of changing one currency into another currency. Similarly, it is also known as the FX market.
Forex comes with a turnover of more than $6.5 trillion; thus, it is the world’s most traded market at the current time. As a matter of fact, Forex turnover had increased from $5 trillion just a few years ago.
In fact, in 2019, the associated derivatives and foreign exchange transactions in the United Kingdom amounted to 3.65 trillion dollars. And, it was just an average daily turnover of Forex.
As a result, the UK came to the position of the world’s largest forex market. And not only in terms of activities where currency get exchanged but also for multiple forex derivatives. In fact, the UK market is over 2.5 times greater than the United States, which is the second-biggest forex market in the world.
What is Forex Trading?
Forex, or foreign exchange, can be defined as a network of sellers and buyers who exchange currency between each other in return for a price. It is how companies, central banks, and even individuals convert one currency into another. If you have ever visited out of your country, you have probably made a Forex transaction.
Although practical purposes are the main drive for foreign exchange, most currency conversion happens to earn profits. The amount of daily currency conversion can make currency price movements extremely unpredictable. For some instant, this inconsistency makes Forex attractive to traders. After all, a greater chance of high risk will also increase the profit.
To learn more about Forex and Forex trading, take a look at this Forex Trading Diploma Course and learn the intricacies of profitable trading.
How does Forex Trading work?
Now let’s see how actually it works before getting to the point is forex trading profitable or not. There are numerous ways of Forex trading; however, they all work in the same direction. By simultaneously selling one currency while buying another.
Traditionally, Forex trades currencies in pairs. Hence, a trader considers whether one currency will fall or rise in value against the other by exchanging currency.
Trade flows, political, economic, and geopolitical events influence a currency pair’s value that affects Forex’s supply and demand. This creates daily inconstancy, and as a result, Forex traders get new possibilities every day.
Therefore, Forex traders take advantage daily of fresh possibilities by being extremely receptive to market news releases. And then they trade based upon the presumed market attitude.
The foreign exchange market serves the global marketplace where banks, investors, institutions, and tourists trade national currencies. This market is available 24 hours a day, and 5 days a week across banks, institutions, investment firms, hedge funds and retail traders. For worldwide individual traders as well.
Besides, there is no centralised marketplace for Forex, unlike other financial markets. Usually, currencies trade over the counter in whatever market is open at that time. Since all trading is performed technically via computer networks, this is also known as the Over-The-Counter (OTC) market.
Global brokers like FXTM provides online trading, which is why you can sell and buy currencies from your electrical devices like your phone, laptop, and PC.
How does Forex Market Works?
You must understand how the market works before diving into the fact is forex trading profitable or no; Joanna in order to grasp the matter. See, Forex trading works directly between two parties in an OTC market. It is run by a global web of banks. These banks are spread over four primary trading centres in separate time zones:
1. London
2. New York
3. Sydney and
4. Tokyo
Thus, you can trade Forex 24 hours a day since there is no central location.
Besides that, there are three different types of forex market:
1. Spot Forex market: It is the physical exchange of a currency pair. Spot Forex market takes place to be settled at the precise point of the trade.
2. Forward Forex market: It set the currency amount to be settled at a specified price, within a set of date in the future or a range of future dates.
3. Future Forex market: It is another version of the Forward Forex market. Unlike the Forward Forex market, the Future Forex market is legally binding.
Is Forex Trading Profitable?
In short, YES. Forex trading undoubtedly CAN be profitable. However, for a lot of traders, it might not be as profitable as a handful of successful traders. Now, perhaps you are wondering how, or why is Forex trading profitable for some traders and not for some? Let’s find out.
How or Why is Forex Trading Profitable?
Well, it’s tricky to answer this question in just a few words. So let us bring you a story instead.
Meet Joanna!
Joanna is a mother of two and has a stable job as an accountant in Aylesbury town. She is relatively successful and can bring in about £72313 a year as income for her family.
Unfortunately, this £72313 is not enough for her to save for her children’s future while also maintaining regular expenses. Therefore, she needs to find £360 as extra income. She soon discovers Forex and researches on is Forex trading profitable for her or not. She finds out that yes, it can be.
However, she also finds out that she can devote only £216 a month to trading. Furthermore, due to her time-consuming job, Joanna can only trade for around 2 hours a day. So how much can she expect from her trading habits? Let’s break it down.
Joanna Uses Leverage to Pump Up Her Numbers
There is this thing called leverage trading in the Forex industry. To explain it as simply as possible, it’s basically borrowing money from the company you’re trading with for a single trade.
Let’s say, for instance, Joanna has £216 on her account, and she uses all of it for a EUR/USD trade. She then applies the company’s 1:100 leverage, which turns her trade into £21650.85 instead of just £216. Of course, at the end of the business, Joanna is supposed to return that borrowed £19,485 with a bit of extra. But the profit she has gained by trading such a large amount can keep her afloat.
In fact, some platforms offer leverages so high that a 100% increase in your trade with favourable conditions is realistic. But only with smaller amounts.
Joanna Chose The Right Forex Broker
Thanks to a couple of hours that Joanna had invested in finding a Forex broker, she can now trade without any fear or hindrance. The company she found offered good leverage, tight spreads, and the ability to withdraw any amount.
Spread is actually the difference between the bid/ask price. So, for example, if I sell you an apple for £10, and you immediately want to sell it back to me, I won’t buy it for £11; I’ll buy it for £10. That £1 is the spread. Therefore, opening and closing positions in mere seconds is often not a good idea.
Most traders tend to wait for days or even weeks to see significant profits. And by substantial, we mean 100% increases in their investments, often achieved with exotic currency pairs or with Brokers with ridiculously high leverage.
Joanna Researched
Before making a trade, Joanna had to research a currency pair; that much is obvious. But, first, she needed to know what type of sentiment is out there in the market, what clues could she find to see where the pair was going shortly.
Furthermore, Joanna had a factor in all of the fees she would have to pay to keep her position open for more than 24 hours. Therefore, a lot of maths is required to calculate the exact returns you’re expecting. Thanks to Joanna being an accountant, she managed to do that without an issue. But what if you aren’t an accountants or maths expert? Well, brokers come with their own software, which helps them predict the expected result.
Anyway, that’s further from the case. So let’s get back to Joanna doing research.
She went to some of the most popular financial news outlets, such as Bloomberg or CNBC. All of the hottest political, economic and financial topics are being discussed and reported. One single article can change the exchange rate overnight. Therefore, she needs to be very attentive. So, what type of article would call Joanna to action?
For instance, imagine an article, “Brexit is happening in October, and the government still doesn’t have a plan”. It’s funny because there was indeed such an article. This news would affect the exchange rate of both the EUR and the GBP. Joanna would be able to see this and prepare immediately. Either to minimise her losses or maximise the profits.
Joanna Used Tools At Her Disposal
There are several tools available for traders on pretty much any platform to find out when is Forex trading profitable. It could be helpful guides, Forex signals, or just tried and tested equations and strategies.
There are two tools that we always recommend to beginners
1. The Fibonacci Retracement level
2. The Simple Moving Average
These two can do miracles for beginners.
So, Was Joanna Able To Succeed?
It all depends on how Joanna looks at success. For example, her goal was to have an extra £360 a month to save for college tuition. Was she able to achieve it? Indeed, she did. The £216 initial deposit, with innovative trading strategies and sufficient leverage, helped her double her investment and even increase it. But would she have been successful if she aimed at £2,000 a month?
No, not with the initial £216, she wouldn’t. Unless, of course, she neglected the first couple of months in terms of withdrawal and kept all of his profit on his balance. With around £3,608 on the account, she would have been able to achieve her goal. Unless, of course, something went wrong. And on the Forex market, something often goes wrong. There is no such thing as a 100% successful trader. If there is, they have been trading for no more than a week and just got lucky.
Now, What Should You Expect?
So, have you got your answer on whether or not is Forex trading profitable for you? We hope you have.
Joanna is an excellent example of how the average can take part in the Forex market. Joanna achieved her goal even with a small deposit of £216, due diligence, and a clear goal. So what should you do to do the same?
- Spend time on finding a perfect broker
- Spend the first month learning strategies and testing them on the DEMO version
- Make your first trade based on facts and news pieces detailing the direction of the market
- Have realistic goals on your profits and don't risk too much to achieve them
- Rinse and Repeat
Follow this pattern, and you’ll be well on your way to financial freedom. Hey, maybe you can even turn Forex into a full-time job? We know many people have and are still on a winning streak to this day.
Now, another question might arise, WHY Forex trading is not profitable for some? Let’s find this out, so that you can take the necessary precautions beforehand.
Shall we?
Is Forex Trading Profitable? Why Not?
Not everyone is successful in Forex, there’s no denying that. Some reasons for losing in Forex trading –
- Unrealistic Expectation
- Lack of Practical Knowledge
- Choosing Wrong Platforms
- Lack of Understanding
- Wrong Strategy
- Not having a Forex Broker
- Not Setting a STOP LOSS Level
- Excessive Leverage
Unrealistic Expectation
If you are exploring Forex trading, you might have explored other investment opportunities. And you might have found that 10% profits a year is excellent returns.
So, if 10% gains a year for other industries is considered good, why are you looking for 100% gains a MONTH from Forex trading?
Now, we are not saying that you cannot beat the returns of other investment opportunities through Forex trading. However, if you think you will start with a meagre amount of money and become a millionaire in a short time frame, you don’t have realistic expectations.
Lack of Practical Knowledge
People who go into trading for the first time are drawn by promises of riches generated by platforms that want to get as many customers as possible. As a result, these people form a significant percentage of the total number of part-time traders.
Starting as a beginner comes with naivety and impatience, which leads the trader to take risks that aren’t necessary and losing money in the process. Some beginner traders are coerced into putting in more and more with promises of greater returns. Others decide to copy the so-called pro’s, and it mostly leads to losses. Our advice to beginners is to be patient and study. Start small and develop their own strategy.
Choosing Wrong Platforms
Another reason for losing money in the Forex market is the platform they decide to work with. Choosing platforms can be difficult because aside from avoiding unregulated companies, traders also have to avoid companies that charge too much in fees. What makes a good platform is how convenient it is to use. From our research, here are some examples of the best trading platforms for beginners:
1. eToro
3. Option180
4. Plus500
5. AvaTrade
Our advice for choosing a platform is to go with the one that offers educative recourses and charge fewer fees.
Lack of Understanding
One of the obvious mistakes that beginner traders usually make is to dive headlong into trading without knowing clearly how it works. Forex can be profitable for everyone, but you need to take the necessary time to study it deeply. The basic concept that everyone is pretty much familiar with is that you agree to exchange a currency for another at a specific exchange rate whenever you make a transaction. But then you need to understand-
- What is a currency pair?
- How can the exchange rate fluctuate?
- What are the concepts such as demand and market expectations?
Wrong Strategy
Just because you’ve learned is Forex trading profitable or not, and all the concepts and theory, does not mean you can start trading right away. Besides, if you do, it is wise not to hope for maximum profitability. Thus, the next step after becoming familiar with Forex trading is developing a good investment strategy.
You currently have access to a set of strategies that people have made available online. However, it would be a slip to believe that just because these strategies have worked for them, they will work for you. Every time you trade, you find yourself in a different situation with certain characteristics. This is where we can include your time, your risk tolerance, and even your personality type. That being said, you need to find the strategy that works best for your particular situation, given that not every strategy is suitable for every trader.
Not having a Forex Broker
It’s time to choose a broker to help you trade. Having the best Forex broker is one of the most important steps on your journey to trading (as we saw in Joanna’s story). Not to mention, these choices will greatly affect your future as a trader.
Currently, the number of brokers available is vast. But then again, depending on your needs and trading practice, only a few of these brokers can help you maximise your profits. And that’s because they all can help you with different tools, discounts and invoice offers.
Therefore, sometimes a broker may offer you a great commission, which will look very attractive to you. Yet, at the same time, they will ask for a huge chunk of money for your initial deposit. In other cases, the initial deposit may be as little as £30. However, this will depend on how often you can withdraw money from your account.
Not Setting a STOP LOSS Level
Another very common mistake that Forex traders make is not to use protective measures. One of these precautions is called Stop Loss.
This Stop Loss concept is an order that you send to your broker asking you to limit losses on a particular trade. Set a Stop Loss level, which basically ensures that you do not lose more money than you expect when a specific trade does not behave the way you thought.
Excessive Leverage
Another point you should consider is limiting your leverage. For example, in forex trading, investors use the leverage from brokers to gain profit from changes in currency exchange rates. In return, brokers get some profit percentage, including their original amount of leverage.
Thus, even though leverage is one most important steps in forex trading, excessive leverage can cost you more than your profit.
So, Can You Do Forex Trading?
Of course, you can. But will you profit from your first trade?
Well, this question’s answer depends on two facts.
- First, your trading strategy.
- Second, the amount of risk you are able or willing to take.
Forex trading is performed on the margin. It means the number of your trades can be greater than the size of your deposit. In other words, you can trade more than you actually own or have.
This can potentially lead your trade to very high profits from Forex. But, unfortunately, the same method goes for your losses too.
So, after knowing all the tactics about Forex trading and is Forex trading profitable or not, now it is really up to you; if you can do it. Hence, it’s totally up to you.
When you decide whether Forex trading is best for you, we recommend considering your financial goals and attitude to risk first.
Final Lines
Usually, declines and profits are extensive in the Forex market. It will mostly depend on your trading strategy, level of understanding, and risk appetite. It’s best to start trading for experience rather than profit in the beginning. And in time, the profits should come with the skills you’ve gathered from experience.
So what do you think? Is Forex trading profitable, or will it be profitable for you?
