Money helps solve problems and frees up our time to enjoy doing what we love. Having money can make our lives better and lives of people around us. There are various ways we can increase our income in this day and age. However, making money is not easy due to fierce competition.
For certain individuals trading currency pairs can become an additional or the main source of income. Let’s take a closer look at what it takes to make trading work for you.
Gain experience and try not to lose the money first
Most beginner traders lose money trading, and no wonder. Trading profitably is a complex endeavor that involves understanding the markets, having trading strategies with an edge, risk management, time management, self management and discipline.
In case you are a beginner, your first goal should not be to make money. Try not to lose it and stay in the business longer. The more time you spend in the process of trading, the more experience you’ll gain. Experienced traders call their first blown up accounts tuition for learning how to trade. Therefore, if you do lose money, it’s important to analyze what went wrong and keep yourself from making the same mistakes in the future.
Learning from your own mistakes is an essential component of achieving success in trading. Learning from other traders’ mistakes is even better. As it can save you a lot of time, energy and money.
Trading methods you can use to make money
To make money in the markets you need to decide what kind of trader you want to be. Keep in mind that trading is profitable when a trading method fits a trader’s personality. For instance, traders that like to read the news and analyze economic factors but hate spending time on charts will make bad technical traders, but these types of traders have a good chance of becoming fundamental ones.
The more you learn about trading the more you realize that there’s no single approach to trading and there are many different trading strategies, trading styles, and trader types on the market. Let’s take a look at some of the trading types that you can use to make money on trading currency pairs.
Day trading or intraday trading refers to a trading process that is concluded within a day. Day traders avoid paying swap fees by trading intraday. Even though trading currency pairs is available 24/5, markets are more active during London and New York trading sessions. And therefore managing time is important when day trading. Day traders are looking for highly liquid markets with low spreads and good volatility to make money. Day traders typically choose trading account types that offer the least spreads. Moreover, there are various types of day traders.
Scalping is a form of intraday trading. Scalpers take advantage of price swings. They open positions at the trend formation and get out whenever the trend correction starts. After scalpers make sure that it’s a correction and not a reversal, they join the trend again. Opening a new position gives traders a good idea on where to put their Stop limits. The Stop Loss orders are usually placed under the price corrections. Scalp trading requires active trade management. Scalpers are glued to their computer screens and they are trading without a long term price analysis. Scalpers are interested in what is happening at the moment.
High frequency trading
High frequency traders open and close a lot of trades within a day. For this type of traders good liquidity and tight spreads are even more important than the others. The number of conducted trades can be as high as 100 or more per trade. For this reason, paying extra fees on spreads can make or break traders. High frequency traders are highly technical traders. They are trading price action and depend less on the fundamental analysis. High frequency trading is usually done by trading algorithms. Most brokers are offering trading platforms that are able to automate trading. MetaTrader platforms being the most popular have great automated trading capabilities. You can learn coding to make your algorithms for high-frequency trading, pay someone to do it based on your views or purchase a ready to use one. But be careful as the markets are flooded with both high and low-quality trading robots.
Swing traders take into account both fundamental and technical data when predicting the price of currency pairs. Swing trades take longer than a day to be concluded. Swing traders do not care much about the spreads, but they care about the commissions and they usually choose the account types that offer the least commissions. The benefit of swing trading is that you are not glued to your screen all day, there’s little market noise. In addition, there’s no evidence that suggests that day trading is more profitable than swing trading. Yes, when you day trade you have more trading opportunities, but you have more losing trades too along with the winning ones. Swing trading is more calculative and requires more patience.
Position trading is more calculative trading. Position traders are more selective in their trades compared to others. As a result, position trades execute less trades and have a higher win-to-loss ratios. Position trading is often confused with long term investing. While they both have a lot in common, long term investing can also be a saving fund for retirement using purchasing various assets. Whereas, position trading is an active form of investing by planning a trade well. If you are someone that hates to lose money, maybe position trading is for you. Keep in mind that losing is a part of the process of trading, however, when narrowing your trading decisions on the best possible setups, you get less losing trades.
Trading with an edge
Whichever trading strategy you decide to use, having an edge is essential for your success. When your strategy has an edge, the more you trade, the more money you make. And if there are no mathematical probabilities on your side, the more you trade, the more you gamble. Now let’s take a look at an example. Let’s say there’s a 50% probability that the trade will be a success. If the trade offers a 1:2 risk-to-reward ratio, the trade has an edge. It may fail to give you good results on your first try but if we make 200 trades using the same strategy, the total amount of money earned will exceed the losses. Keep in mind that edge only works when coupled with risk management. Risk management helps you to conduct these 200 trades and keeps your account from blowing up.
Once you decide what kind of trader you want to be, the next goal should be to learn how to manage your risks. Risks are plentiful in the world of investing. As already mentioned, for trading edge to work in your favor, risk management is essential. Proper risk management helps you not to be dependent on any particular trade. Generally, professional traders risk 1-5% of their trading account balance per trade. If the trading setup looks too good, an experienced trader might risk 5% of the capital. If the setup looks regular, the risk might be equal to 1%. Limiting risks to percentage points guarantees traders that their funds will not reach 0. If the balance decreases in size, the risks decrease alongside them. For example, If you had 10,000 USD on your balance and were risking 100 USD (1%) per trade, in case the balance amount becomes 5,000 USD, your risks will decrease to 50 USD(1%) per trade.
Human emotions are considered as flaws among professional traders and rightfully so. Emotions do not help to analyze the markets on a factual basis. In fact, emotions do the opposite, they jeopardize our performance.
We’ve already mentioned the importance of trading with a strategy that offers an edge and benefits of using risk management to let that edge work. Having a healthy psychology binds everything together.
Discipline is the single most important skill that can dramatically influence trading results. You might have the perfect strategy, resources and office space ready for trading but in case you lack discipline to execute the strategy, you will fail. It’s one thing to know what is the right way to trade and the other to actually trade it. For example: we all know that healthy eating and exercise is good for health, but do we have the discipline to act accordingly?
Risks related to human psychology
Greed is the number one enemy when it comes to trading profitably. Greed makes traders ignore risk management and take huge risks. Risks and rewards are positively correlated.
Revenge trading can destroy an account balance in a day. Traders who refuse to accept the losses aim to make the money back as quickly as possible on their next trade. Usually, they ignore the trading setups and risk management strategies, which never ends well.
Boredom can lead to overtrading and result in huge losses. Trading is not always an active activity. There are times when markets are not giving you any trading opportunities. There might be days when you sit in front of your computer bored to death. To protect yourself from such feelings, having a side job, side business or a hobby can help.
The main takeaways
To sum everything up, trading consistently profitable is a complex process and consists of developing a profitable trading method, having a good risk management strategy and a proper psychology. It’s essential for your trading method to have an edge. Without an edge, the more you trade, the more you will lose.
Most beginner traders blow up their trading accounts and if you can manage not to lose money, it will be a good achievement for a start. The more experience you get, the better you will become at trading. You can become a day trader, scalper, high frequency trader, swing trader, position trader, etc. No matter which strategy you choose, it’s important to offer an edge. It’s essential to manage your risks to let that edge present itself and develop a healthy psychology to protect your trading from greed, revenge trading and overtrading due to feeling bored.
FAQs on how to make money forex trading
How do I make money in forex?
Making money consistently on the markets comes with hard work and experience. If you are a beginner, the first goal should be not to lose money trading. It takes time to develop the right attitude towards trading and the right trading systems that have an edge.
Why do most traders lose money trading?
Most traders lose because they do not have a trading strategy that provides them with an edge. They fail to manage risks and fail to manage their own emotions. In order to trade consistently profitably, all of these components must be working in your favor at the same time.
Is forex a gamble?
Forex trading is not gambling. Many professional traders consistently profit from speculating currency prices. However, for certain individuals Forex can become a source for gambling. In fact there’s a large number of traders that blow up their account balance shortly after they deposit the funds.
Is forex a good way to make money?
Yes, for some investors. However, keep in mind that It is also a good way to lose money if you do not have proper trading methods, risk management and psychology in place. Traders can make money by investing their own funds or by making trading as a career and managing other people’s money. Traders who manage institutional funds usually have salaries and performance bonuses. On the other hand, retail traders that manage their own capital only have earnings based on their performance.