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?
Your 4-step guide to opening a trading account
Step 1: Getting registered
To know for sure the answer to "Is forex trading profitable", you'll need to register. It's very easy to open an account with Exness. Click here to open the sign-up page in a new tab. If you want to get everything done in the next 10 minutes, be sure to have a credit card, ID, and, proof of address by your side. You can choose to open a demo account without these things. Either way, everything you need to know is here in this two-minute video. Pause the video as you go through the first three steps.
Tip: Account type depends on the amount you wish to deposit. Leverage is effectively an interest-free loan that the broker offers. It allows you to make a large investment from a small deposit. If you are looking for high profit with high risk, a higher leverage might be right for you. If you prefer slow-burning safety with lower results, then keep your leverage low. You can never lose more than you have, but higher leverage means faster results... both good and bad.
Step 2: Prove who you are
Exness takes security very seriously, and they check every client signing up. Just like opening a bank account, you'll need to prove who you are before getting access to the global markets. Watch this one-minute video to see how.
Tip: While you're waiting for your real account to be approved, open up a demo account and start getting to know the trading platform.
Step 3: how to get access to the market
Trades are made using the award-winning MT4 trading platform. Inside the box of the demo or real account you'll see a gear cog. Click the gear cog to make a deposit. Use the passwords provided in the email. Click the gear cog again and select SIGN IN TO MT4 WEBTERMINAL then follow this one-minute video. You're about to make your first virtual trade on the real markets.
Step 4: making a trade
As a default, the top currency pair on the list will have an open chart. Right click on the chart and select the “close” option.
As a professional trader, selecting the right pair requires some research. For a first-time test, any pair will be sufficient. Drag a pair from the list of currencies on the left side of the trading terminal. The old saying goes, “what goes up, must come down.” Obviously, this principle goes the other way too. Your mission is to find a moment when the price direction is going to swing or reverse. If you feel the price is about to go up (bullish), then BUY, if it looks like it’s been trading high and the price has started a downward (bearish) trend, then SELL.
Open a trade
There are many ways to open your trade. You can select from the buy and sell options on the top left of the chart. Preferably, double-click the currency pair on the list. Right click on the chart when you’re ready to make your first trade. Time to set the volume depending on how confident you are in the direction you are forecasting. This is the perfect time to set your stop loss and take profit. Click the arrow to the right of the stop loss and take profit prices.
Note how the blue and dark red lines in the popup graph sit above and below the buy(ask) and sell(bid) price. In the example, we traded long (buy) and got a message confirming the order was successful. If you get an error, your volume was too high for your balance, or your stop loss/take profit was too close to the spread. Remember, every order starts as a negative because of the spread. Be patient. Your take profit will activate when the time is right, and your stop loss is protecting you. To close an order, you have three options. Click the X on the right or right-click the order. If you double click the order, you can close or modify the order.
You now know how to make a trade. Very soon you'll be able to answer the question: Is forex trading profitable? Forex trading can be an exciting way to spend your free time, and you'll actually learn some real-world skills that will serve you well throughout your lifetime. Be patient, learn, and who knows, you might one day be one of the lucky few full-time traders. How will you spend your day?
Didn't start yet?
This article is a marketing communication and does not constitute investment advice or research. Its content represents the general views of our experts and does not consider individual readers’ personal circumstances, investment experience, or current financial situation.
This article is not prepared in accordance with legal requirements promoting independent investment research, and Exness is not subject to any prohibition on dealing before the release of the article. Readers should consider the possibility that they may incur losses. Therefore, Exness is not liable for any losses incurred due to the use of its articles. Please note that past performance of an asset is not a reliable indicator of future results.