Is Forex Trading Profitable?
Forex trading can be a bit difficult to understand for newcomers, but they all have the same question: Is forex trading profitable? The short answer is that, yes, it can definitely be quite profitable. There is obviously more to it than that and this guide will help you to better understand profitable forex trading.
Three Factors To Consider When Attempting To Achieve Profits From Forex Trading
While there is no magical formula to follow to turn a profit with forex trading, there are definitely factors to keep in mind. These three factors will give you a leg up on the competition and help you on your path to becoming a profitable forex trader.
1. Trading Strategy
Like any other market, it is helpful to have a strategy going in. Unless you have years of experience under your belt in a particular market, trading on a whim often leads to wasted money. That is why having a plan going in is of the utmost importance.
Having a strategy in place gives you a better idea of when to buy or sell a certain currency pair. The best forex trading strategies allow a trader to analyze the market to execute trades with confidence. Not only that, they have sound risk management techniques to mitigate potential losses.
There are too many strategies for forex trading to cover comprehensively in this space, but these strategies require putting together several factors to find the trading strategy that works best for you. The most important thing is that you are not only comfortable with the strategy, but that you understand it well.
2. Risk Management
Of course, even the most sound of strategies won’t mean much if you don’t have a proper game plan for risk management. Risk management is understanding the potential losses of the market and deciding on how much to risk while still trying to maximize gains.
There are several factors to truly understanding risk management. The first is to understand market risk. This is common and is where the market performs differently than you expected. This can and will happen, which is why risk management is important.
There is also leverage risk. Leverage can be used to open trade larger than a deposit, but it is possible to lose more money than you have deposited. Leverage risks are generally not a good idea unless it is done by seasoned forex professionals.
The risk of ruin is the biggest risk that forex traders face. This is where you run out of the necessary capital to execute a forex trade. The key here is to know what you are willing to lose and not bend from that. It won’t feel good to lose that money, but it will also keep you from investing funds that you originally had not counted on wagering.
There are other aspects of risk management that are definitely worth looking into before diving into the forex market. The stronger understanding you have about risk, the better your approach to trading on the forex market will be.
3. Portfolio Diversification
There is an old saying about putting all of your eggs in one basket and this is where portfolio diversification comes into play. By diversifying your portfolio, you lessen the risk of one big loss sinking your entire investment egg.
If you are trading in a particularly volatile currency, it is a great idea to split your investments up and have some more secure options, too. This is a general investing practice to mitigate the potential loss you experience if one investment tanks.
Not only that, portfolio diversification can keep you in the game longer in most cases. By spreading out your portfolio, you lessen the risk of losing everything. You might make a bad investment or two, but it is unlikely that you will make several bad investments.
Keeping your portfolio diverse is one of the keys to survival in a volatile forex trading market. It will insulate you from risk of ruin and help you to live to fight another day in a complicated investing world that is forex.
3 Best Ways To Make Forex Trading Profitable
Again, keep in mind that this is not scientific. Foreign exchange markets can change quickly and while there are trends that can help in the prediction of a particular market, it is not a guarantee. That being said, there are definitely strategies to follow that can make you more profitable trading forex over the long-term.
1. Always Use Stop Losses
It is the worst-case scenario: investing in a particular currency only to see it plummet like a boulder to the bottom of the ocean. The feeling of shock and awe is one that many have experienced and is something that we all try to avoid.
That is where a stop loss comes into play. A stop loss allows you to set a point where you deem the loss to be your stopping point. This saves you from experiencing a complete ruin should a currency completely tank.
The most important thing to consider about a stop loss is that we cannot see the future. The future of currency prices is completely unknown to the market and every single trade is a risk. By having a stop loss order, you provide yourself with necessary insulation so that even in the worst-case scenarios, you can live to fight another day.
2. Never Make Emotional Trades
It is safe to say that the vast majority of us have been there: we find ourselves particularly interested in a stock or currency and can’t help but stick with it even when all of the signs tell us to abandon ship. This is one of the quickest ways to find yourself in risk of ruin in the forex trading market.
Trading emotionally is dangerous because it leads to holding on to a failing trade for far longer than is advisable. For whatever reason, that emotional investment can bring about a sense of pride and pride goeth before the fall.
It is understandable to get attached to a particular trade for whatever reason, but the fact of the matter is that those emotional trades will do you more harm than good. Avoid clinging to a particular trade and you won’t wind up losing everything because of a particularly volatile trade.
3. Follow Closely Both Fundamental And Technical Indicators
There are ways to analyze the data presented by the forex trading market and it is important to know the differences between them and how each can be beneficial to your trading success on the forex market.
The first is fundamental analysis. This is evaluating a currency through its intrinsic value. This is to forecast the price movements using traditional charting patterns. Fundamental analysis, meanwhile, uses a variety of economic data to establish a value or target price.
To break it down further, fundamental analysis will look at the overall well-being of a country. This well-being analysis also means establishing the health of that currency. This method does not take currency price movements into account. Forex traders will use specific points of data to determine the strength of a specific currency.
Technical analysis, meanwhile, looks for pattern recognition in price chart form. They look for flags, triangles, and double bottoms and, based on that pattern, the trader will determine the points of entry and exit for that currency.
A technical trader isn’t concerned about specifically why something is moving. This is because they are following the patterns and trends on their charges as their signals.
The most effective forex traders should follow both of these analyzing methods. Neither is foolproof, but both offer valuable insight into why a currency moves as well as tracking its trend in the near future.
Like trading of any kind, there are profits and losses to be had. The key to profitable forex trading is in analyzing the different trends and trying to predict where they will head next. Since predicting the future is naturally volatile, there are other aspects to consider.
Having a strategy that you understand and are confident in is the first step. Understanding what you are willing to lose and how you are willing to risk your funds is the next. Not putting everything into a single investment is the third.
With these three pillars to build your foundation upon, you can begin to see positive trends in your forex trading portfolio. Continue to analyze and recognize trends, avoid emotional attachment, and use stop losses as a buffer and you can begin to mitigate those losses and turn them around into profits with a little bit of research, instinct, and smarts.