Does Forex trading actually work?
It is not uncommon for us to see people on the internet bragging about being forex traders, or commercials that promise large profits if you start trading. However, that always sounds too good to be true, right? If it were that easy to get major earnings, everyone would be doing it, and everyone would be rich.
Today, we will be taking a look at what forex trading really is like, whether or not it works, if it is worth it, and what someone who wishes to start should know about it before entering the world of forex trading.
But, before we get there, let's quickly cover some basics, just so that everyone can understand some of the most important terms.
What is Forex trading?
When it comes to the word 'Forex' itself, it is a term that is short for foreign currency and exchange, or simply — foreign exchange. Exchanging money is something that many people around the world do almost on a daily basis, often for the purpose of travelling to another country, making online purchases, and alike.
However, buying one currency with another is also done in order for people to earn more money by exploiting the changes in prices. Basically, if you expect some currency to grow in value, you can speculate on this change by investing another currency that you already possess. When the currency you speculate about increases by a certain amount, you can make a profit.
These changes in foreign money's value are influenced by a number of factors, such as geopolitical events, which can have a large impact on the currency used in certain countries. Successful forex (FX) trader needs to constantly follow such events in order to predict how the money might react. Fresh knowledge of events and deep understanding of how the market behaves is crucial, although forex traders often use a variety of tools that help them predict the price movements.
Forex trading has been around for decades, and it has grown to become one of the largest and most liquid markets out there, with a daily trading volume of over $5 trillion.
Another thing to understand that forex trading is a form of CFD (Contract For Difference) trading, meaning that you are speculating on the asset's value. In this case, the asset is another currency. In other words, you don't actually get to own the asset in question, you simply make educated, well-informed guesses of what it might do next, and if you are right — you earn some money.
As you can see, this is a large, complicated market that requires a lot of knowledge, experience, research, and of course — money for making your original investment. However, there are a few more things to know about forex trading before you just jump into it, so let's see what there is to learn.
75% of forex traders lose money
According to some estimates, the large majority (up to 75%) of forex traders fail and lose money while trading. This is a well-known fact that somehow still fails to discourage new traders from entering the market. While this percentage looks rather grim, it still implies that 25% of people tend to do rather well. It also might not be entirely accurate, but let's assume that it is.
Why do people lose?
The answer is actually surprisingly simple — people don't know what they are doing. We have mentioned already that forex trading is extremely complicated — much more complicated than it seems. The act of actual trade is easy, but knowing what kind of trade to make at any given time is what gets you.
This is where most people make mistakes, as they assume that it is easy to invest simply by watching which currency is growing and which is dropping and move on from there. The fact is — you need to make your move before the currency's price starts changing; otherwise, you are already late.
Price shifts are often long-lasting, and they usually come in a brief surge, only to experience corrections after only a few hours, sometimes even faster than that. In other words, if you join the party late, you are far more likely to see losses than gains.
Instead, you need to learn when is the right time to invest and to do that; you need to educate yourself.
Education is key
What do we mean by educating yourself? It is rather easy to explain, but it will be a lengthy and difficult process. If you do not have patience and a will to learn and experiment a bit along the way, forex trading is probably not a good place for you to go.
That is the first thing to keep in mind — the fact that patience is something that you need to have in huge quantities.
Another thing that you need to understand is that you cannot beat the market. Instead, you need to befriend it, learn to understand it, notice the way it moves and breathes. In other words, you need to be able to see the subtle signs of an incoming change and then make your move.
The market will reward you for understanding it, but in order to do that, you need to abandon the 'beating the market' mindset.
Of course, educating yourself on current events around the world should go without saying, as these are the things that impact the prices of currencies the most. The economy of a country whose national currency you are interested in is among the first things you must do. Follow what its companies are doing, what the government is up to, what is the country's financial situation, are there job openings, how many people are unemployed, and all other details you can think of and dig up.
With these details in your possession, you will know what to expect, and each positive event is likely to have a positive impact on the price of the currency. Remember, it is much better to miss an opportunity than to make a wrong move. It is better to be sorry that you don't have more money than to lose what you already have, which is something that a lot of traders experience due to a simple reason — greed.
Greed leads to ruin
Obviously, when you are out there, trying to make a profit, you are open to any opportunity that comes your way. However, a lot of these opportunities only seem like good opportunities, while in reality, they are not. Still, many people get blinded by this desire to earn, which is what leads to making a poor decision, and in the end — lose money.
Greed is an easy trap to fall into, especially if you are careful at first, and you manage to make some money by making good decisions. The rising profits tend to make people feel like they know and understand the market completely, and that they are invincible.
This feeling is often revoked after a single bad move, and the surer in yourself you are, the larger the amount you use for your trade. In the end, that means that you lose more money, which is never in your best interest, except as a harsh lesson that the market doesn't have favourites.
Think of it as a tool, and it is up to you to use it in a smart way. This also leads us to our next point:
Don't allow your emotions to lead your decisions
Throughout this text, we have hinted at using logic and knowledge, rather than emotions, feelings, or luck. Luck is a great thing to have, but a bad thing to rely on, so always assume that you won't get lucky with your move. That still leaves cold calculations that can allow you to make the right call, provided that you have as much information as possible.
This can also be very difficult to remember at times, as experiencing a few minor losses can put you in a state of anger, where you start making random moves instead of thinking them through. Alternatively, you could simply feel too scared to make a move, which could lead to missing out on good opportunities.
Winning is also just as bad, as we discussed before, as it makes you feel like you simply can't do a wrong thing, and that feeling usually doesn't last. If you ever start feeling like that, it is best to quit while you are ahead.
Learn proper risk management
Risk management is another thing that every FX trader needs, as it is key not only for winning but for bare survival when the times are tough. Even the very best traders end up making a wrong move from time to time, and without proper risk management, they could easily be wiped out.
Remember that your primary objective is not making a profit but protecting what you already have. If you lose all of that, you are done, whether you are ready to leave or not.
Proper risk management is a lifesaver in these situations, and you can protect your capital by placing stop-loss orders, and moving them when you are satisfied with your earnings. Get out of trades that no longer make sense.
You should keep in mind that the market isn't fueled by your optimism, but by facts and larger sentiment. In other words, don't go against the trend, unless if you are sure that it will shift relatively soon. Psychology is a major part of the trading world, and the sooner you tap into it, the better.
But, even with all that, you must also always keep in mind that forex trading simply doesn't work for everyone, and while some people can make a living out of it, it doesn't mean that everyone can.
Don't quit your job
You have probably heard more than a few stories of people quitting their day job in order to live off of forex trading. It is an incredibly risky move to do so and not for first-time traders. If you want to know if you have what it takes to do it then read “Trading Forex For a Living”
Being moderately successful with forex trading is a bad reason to quit your job, as you have nothing to back you up if you start losing or get forced to stop trading. Job is a certainty — or at least, it is as certain as it can be in this day and age. Trading, on the other hand, comes with a large amount of risk, especially if you decide to trade with leverage.
Trading with leverage is a friend, as well as an enemy
While we keep insisting that trading is risky, its risk pales in comparison to that you face when you trade with leverage. When you trade, you are basically betting on the future price movements, as mentioned, but you do have some space to make smaller errors and still make a profit — or at least not lose that much, depending on the move you make.
Trading with leverage eliminates that extra space, and you need to be extremely precise with your prediction in order to win. Winning can be very rewarding, but the more you stand to win, the more risk accompanies it.
In the end, if you are not prepared to take that risk, you should probably avoid it. There is a reason why only professional traders see gains from trading with leverage, and if you are a novice — take your time. Learn basic trading first, and then move up slowly. That way, you won't get overwhelmed, and you will stand a better chance of seeing gains.
Take your time, and stick to your strategy
Finally, it is time to talk about strategies. Strategies exist for a reason, and that is the fact that they work. Of course, they don't work 100% of the time, and sometimes, they need modifying, but that doesn't mean that each minor shift in the market requires you to change your plans.
A lot of traders fail to understand that, and they tend to jump around a lot, often hoping to catch a fleeting opportunity. This can only lead to further losses. Instead, you should learn about different strategies, check out their pros and cons, their strengths and weaknesses, and decide which one to use.
Modify it in a way that will make it useful under your specific circumstances, and commit to it. As mentioned, there are situations where changes are necessary and where the strategy might turn out to be a bad one, but more often than not — strategies work, which is why they exist.
Lastly, accept that you will need time, education, investment, and patience. No one was born with the knowledge of how to trade, and everyone had to travel down the same road to learn it. There are no shortcuts, as only the experience can make you better. That is why you should start with a small amount, no matter how useless it might seem. Winning with small amounts is still winning, while the loss won't ruin you financially.
And, of course, never, under any circumstances, risk the money that you can't afford to lose. Always trade with the extra money, and never use what you can't live without. Losing that is a risk that you can't afford to take, and that is what forces you to make unreasonable decisions in order to try saving what you can.
The best way to go about it is to use the money you don't need and to consider it lost from the moment you start trading. That way, any surprise will be a positive one, and you will be properly distanced from your funds, and capable of thinking clearly.
Forex trading is a great way to enter the trading world and learn about how trading works. However, in order to have any hope of making a profit, you need to take the advice we have shared here to heart.
Forex trading is not random, and you can't approach it as such. However, it needs a lot of effort, knowledge, and experience. Sometimes you'll win. Sometimes you will not. You will get better in time, and someday, you may even become a professional.
Until then, think logically about your approach, make and use proper strategies, know your limits, expand your knowledge, and don't invest what you can't afford to lose. Oh, and seriously — don't quit your job for forex, that is very unlikely to end well.