As a forex trader and writer, I’m regularly asked one particular question. Is forex trading profitable? There isn't a simple answer. The short answer is “It depends!” The long answer may well surprise you. Below, I'll cover the factors that can contribute to forex trading success. We’ll look at how traders incur and avoid losses. Plus, we’ll reveal some effective money management techniques.
You’ll also get a clearly defined “number” based on a popular trading strategy, and a detailed explanation of how to implement it in your trading style. While no forecasting method ever comes with a guarantee, a tried and tested trading strategy can offer benefits that will help you improve your forex trading performance.
Try this trading strategy out on your demo and real accounts.
Factors to consider in forex trading
Take a look at the important points below. These factors play a major part in your trading success. Combined, these factors determine both profitability and risk. By optimising your trading behaviour, you can begin to customize a strategy that best suits your trading goals. Perhaps the three most important factors are:
- Day and time
- Trading Instrument
- Trading volume
When you first enter the markets as an online trader, you’ll find that trading conditions can vary quite a lot throughout the week. Some days are significantly more volatile than others, and over time you’ll learn how to control your risk in all types of conditions. If you are a new or cautious trader, consider avoiding high-importance news releases or market opening times, which can be incredibly risky.
Firstly, stay informed by checking the Economic Calendar every day, so that you are prepared for market-moving economic events. Certain news releases and events can trigger high volatility in the markets, which means that you’ll see huge swings in the price of an asset. Volatility is caused by a rapid increase in buying and selling, and this sudden spike in active trades can significantly increase profits and losses.
If you’ve already signed up with Exness, try checking the price chart of any of the currency pairs. Any valleys and peaks on the chart were actually high-risk/ high-return time periods. Less mountainous lines indicate trading periods of low price movement that offered safer but less attractive opportunities. Ideal trading times are hard to predict, and they depend on which currency pair you’re looking at. This brings us to the next question.
Which forex pair?
Often, choosing which forex pair to trade is the hardest decision for a newbie, and it’s important to learn which forex pairs are less risky. Let’s break the currency pairs into groups to better understand what to expect. There are three main forex pair groups: the majors, the minors and the exotics.
There are four major pairs. Notable is that all majors contain USD:
- EURUSD (euro/ US dollar)
- USDJPY (US dollar/ Japanese yen)
- GBPUSD (British pound/US dollar)
- USDCHF (US dollar/ Swiss franc)
In general, the majors experience much lower volatility compared to the other two groups. This is primarily due to the fact that there is always market liquidity (constant BUY & SELL orders in large volume). Majors are by far the more popular and reliable group of currencies, but that doesn’t mean they are easy to trade. Majors can still have epic reactions to political news and fundamental releases.
Then there are the minor pairs. The minors, or cross-pairs, are much less traded compared to majors. In most cases, Minors are considered to be a more challenging option as they have a wider spread than the majors, which makes profitability slightly harder to achieve.
Lastly, there are the exotics. Relatively overlooked currency pairs such as USDSEK (US dollar/ Swedish krona) have low liquidity (less trading volume) which makes the pair far more susceptible to news releases and political events than any other group. Making significant profits can be harder to achieve with exotic pairs, unless you are willing to make larger investments on the market and get in or out quickly.
Trading volume is perhaps the number one factor when calculating potential returns. The higher the investment, the greater the profit or loss as the price moves. Most traders would probably agree that opening multiple modest investments is a much safer way of increasing trading volume. Diversification or ‘not putting all your eggs in one basket’ is a common trading practice that can reduce your risk when done correctly. One of the keys to building a successful trading career is to follow a strategy, so that you can set realistic expectations and efficiently control your trading.
So, is forex trading profitable?
It certainly can be with the right conditions and a solid strategy. But like life, there are no guarantees in trading. Just because a certain strategy worked in the past, it doesn’t mean it will work in the future. Spend some time learning about strategies, including the one we will look at now. Every successful trader is well aware of this strategy - it’s called Money Management. Is forex trading profitable? It can be for traders who are willing to first invest time in their education.
The money management method
Both scalping and day trading are very popular strategies, but neither help when it comes to deciding on trading volume and how to pursue a specific profit target. That’s where the money management strategy comes in.
Using money management, a realistic profit target for an experienced trader usually starts at 20% of deposit, but that number can rise in proportion to the trader’s experience. Here’s an example or a 20% strategy.
- Deposit: $500
- First trades: 20% (5 X $20 market orders)
- First day target: $4 per market order ($20 total)
That means risking $100 to make $20. So a trader following the 20% strategy makes a $500 deposit.
Now, imagine that the trader sets 20% of the deposit for trading and opens 5 X $20 orders. Each order has a “Take Profit” and “Stop Loss” set at $4. As each order closes, the trader opens another until the daily 20% profit is reached or the budget is depleted. At the end of the trading session, that 20% gain is returned to the account equity, ready for the next day.
This means the amount available for the daily trading budget has risen to $520 thanks to the winning trades. Calculating 20% of that means $104.00 for the next day’s trading budget. Target profit is now $20.80. In keeping with the 20% strategy, the trader can’t ever risk more than the daily budget … no matter what!
Money management often sounds a little restrictive to many new traders. Most trading strategies do, and they don’t offer any guarantees. The 20% strategy is known for being a very conservative money management system that forex brokers often see from cautious traders.
With multiple smaller orders, the chance of an unexpected price movement wiping out the daily budget is reduced significantly. If a trader wants to target higher returns, the recalculation always starts at the deposit. Another advantage of using the 20% money management strategy is that trading can become a more long-term endeavor. Money management also opens the door to the compound effect and the astounding results that accompany it.
The compound effect
Is forex trading profitable is a question some say they know the answer to. Many successful forex traders will attribute it to the compound effect. This basically means raising your level of investment in proportion to your equity. A 20% daily increase of your trading account could potentially turn $200 into over $200,000 in less than six months.
Of course, it would be foolishly optimistic to think you could constantly hit your daily target and not have losing trades. My point is that setting a cautious daily target at 20% is not as conservative as you might think. Consider it a convincing reason not to get impatient and start increasing the risk/ reward ratio prematurely.
Also, if you start trading more conservatively, you’ll be able to build valuable skills and experience in a much less stressful trading environment. Another benefit of using a money management system is that you can better experience the challenge and excitement of online trading without worrying about losing everything on one bad day’s trading.
Ready to get started?
Not sure how to get started? No problem. Follow this step-by-step guide.