Forex trading is the buying and selling of currencies to make a profit. The market trades at a high volume and has high liquidity that can provide lucrative conditions for traders. Furthermore, the forex market is open 24 hours a day, 5 days a week, providing traders with trading opportunities across various time zones and international trading sessions.
Can you make profits from trading forex?
Forex trading is not a get-rich-quick scheme. Like all other financial instruments, an understanding of the market and sound trading strategies are necessary in order to trade profitably.
Markets can be volatile and the results of some economic events that will impact price movements cannot be predicted. With knowledge, experience and proper risk management, trading forex can be profitable over time.
FX trading strategies
To become a successful trader, it is important to develop a strategy that takes into consideration your risk appetite, time horizon and trading style.
Some common strategies used include:
- Price action trading
- Day trading
- Swing trading
- Position trading
Each strategy has its own pros and cons, and traders will need to consistently refine or rebuild their strategies to suit the ever-changing market and their personal risk management measures.
Read more in our article on “Forex trading strategies”
FX trading tips to stay profitable and sustain an edge
We’ve established that while it is possible to make profits, there are no fail-safe trading strategies. Let’s explore some suggestions to help you make better decisions and develop an edge to stay profitable.
Forex trading requires the analysis of market conditions and the discipline to follow the rules you’ve set for yourself. These rules are based on your risk appetite and preferred strategy. It is normal for the market to move against you at times, and it is impossible to expect zero losses.
The focus should thus be on developing risk management systems to protect the potential downside of each trade.
You should also be disciplined to read up on market news and events and keep daily logs of your trading progress to analyze the performance of your strategy over time.
Experienced traders keep their emotions in check and abide by their own risk management rules when entering trades, resulting in more sustainable and consistent profits in the long run.
Use a stop-loss
Stop-loss is an essential component of risk management and is an order to exit from trade after a certain amount of losses are incurred when prices move against your favour.
By using a stop-loss, you will be able to manage the maximum losses you are willing to take for each trade, and safeguards you from sustaining excessive losses in the event that the market moves against you.
Nonetheless, it is possible for stop-losses to fail when the market behaves unpredictably and large unexpected price movements appear. During such market events, the stop-loss order would be executed at the next price available, resulting in a larger than expected slippage and loss on the trade.
Realistic profit goals
Setting profit targets are equally as important as setting stop losses. This helps you to keep disciplined and exit your trade at your take-profit level, instead of holding on to the hope that the market will keep moving in your favour.
Keeping your emotions in check and following your rules for every trade is the key to a disciplined and sustainable trading strategy.
It is also important to have realistic profit targets by studying the average daily volatility of currency pairs that you are trading, which along with other indicators, will help you identify reasonable take-profit levels.
The 1% Rule
Traders often set a limit on the risk they are willing to take per trade. A standard recommendation is to risk no more than 1% of the available capital on any single trade, after considering brokerage and other related fees.
It is common to have a few open trades at the same time, and staking large percentages on one single position opens you up to the possibility of high losses. Sticking to a rule to limit the amount of money risked per trade can help you to avoid losing your entire capital in one bad trade.
Do your research
To formulate a successful trading strategy, it is important to perform your own analysis and research, understand the fundamental and technical conditions, and conduct sufficient backtesting before you dive into live trading.
Fundamental analysis and keeping updated on the latest market events and macroeconomic news is important for understanding current market dynamics, while technical analysis could give you an idea of where the market could be headed next, as well as determine price levels to enter and exit trades.
Avoid high leverages
Leverage allows traders to trade with relatively small amounts of initial capital, however, it is a double-edged sword that can either bring high profits or severe losses. Beginners are encouraged to use a lower amount of leverage to protect against those risks while learning to understand the market and formulate a sound trading strategy..
Performance in forex trading largely depends on your risk appetite, trading strategy and expertise. The key takeaway is that it is impossible to avoid losses completely, and traders should focus on developing a strategy that is sustainable, and adopt a disciplined approach to risk management in order to optimize returns.
The article is a part of our comprehensive series on “What Is Forex Trading: A Complete Guide”