Is FX Trading Profitable?
The foreign exchange (forex) market attracts a lot of traders from around the world. People invest in the currencies through this decentralized global market for earning instant profits. The over-the-counter aspects of forex trading make it one the best marketplaces to make money. However, the volatile movements in currency prices make forex trading a high-risk venture. People question the surety in determining the foreign exchange rates for their currencies and how those rates would fare shortly. Forex traders aim to not lose money from the risks of buying, selling, and exchanging these currencies. The current or determined prices of these currencies keep changing, which adds to the challenges of being a profitable forex trader. Despite this, people invest millions in forex trading, so there has to be some truth to its high profitability. Let’s find out how.
How to Earn Money from Forex Trading
In forex trading, currencies are traded to make money. In this process, currencies from around the world are available for trade. Consumers from the US buying cheese from France have to pay the French in their native currencies, which, in this case, could be Euros (EUR). Hence, the trade involves exchanging the Euro-equivalent value of US dollars (USD). Depending on their exchange rates, US consumers may get the cheese a lot cheaper or a bit expensive. This is where the profitability of the trade is determined. Forex trading helps people make money in the same way, sans the trade of any goods or services.
The key characteristics of the forex trading market:
- The market is a global marketplace where all national currencies can be exchanged against each other.
- Currencies are traded against one another as exchange rate pairs (EUR/USD).
- It is a spot (cash) market and operates as a derivatives market by offering futures, forwards, currency swaps, and options.
- Traders can hedge against international currency and interest rate risk.
Every week, forex trading is open 24 hours a day for five-and-half days. When the day trading hours in the US end, the day trading in Tokyo and Hong Kong begins. Hence, forex trading is highly active at any time of the day and experiences constant changes in the exchange rates and price quotes.
The Profitability of Forex Trading
There are different ways in which forex traders can profit from their activities. But, it is important to understand the key assets and categories that are involved in forex trading. Through these asset classes and their features, retail traders can make long term profits from currency trading.
Forex Asset Classes
When currencies are considered as a financial asset, they get two distinct features as an asset class. A currency trader can make money from the differential interest rates between two currencies or profit from the changes in their exchange rates. An investor can make a huge profit from the difference between the two interest rates. This difference grows when two different economies are involved in the buying or selling of the currency. The currency with the higher interest rate is to be bought while the one with the lower interest rate is to be sold. For example, before the 2008 financial crisis, a common day trading strategy was shorting the Japanese yen (JPY) and buying the British pounds (GBP). The interest rate differential of the JPY/GBP pair was very large at that time. This trading approach helped investors or brokers in making money effortlessly.
After understanding how the process works, the best way to earn profits is the practice of speculation. Every retail forex brokerage offers professional speculator services to help their clients with maximum profits. Similarly, retail forex traders can become speculators themselves and utilize their plans for profitable trading. In a shorter time frame, forex speculators can outperform the profits made by traditional long-term brokers. These speculators are adept at risk management. They can take risks by investing in volatile currency pairs if they anticipate some promising price movements in the immediate future. Their hope of making large gains and avoiding every loss possible is often used to determine the offset of a risk.
Speculators take a look at currency pairs based on their risk factors. If they realize that these risks will not last long, they invest heavily in such pairs. The trading mindset of speculators is evolved in a way that it can perform long-term risk management with its trading plans. From position sizing and executing stop-loss orders to monitoring their trading performance statistics, forex speculators can make profits from the most sophisticated trades. Their formula to get rich comes from attempting to predict price changes and extract their profit from anticipating every price move in the specified asset. For example, they may utilize 50:1 leverage and magnify their returns as a personal choice. Profitable speculators use online internet cookies to trace trading patterns and repeat them in the native marketplace. These cookies identify commonalities between the rising and the falling prices. Speculators also use these cookies to extract information that can profit them in the future if the price goes up or down.
Forex speculators use a detailed trading plan to predict these prices, which are always moving. There are infinite variables that need to be considered, which is why each speculator develops its unique trading plan. Their way of trading forex pairs is sophisticated for an investor or a retail trader. They buy currencies for short periods and employ their skills adaptively to profit from the price changes. Individual traders become speculators when they purchase currencies as a financial instrument for a short time, only intending to profit from the changing prices. Market makers can also become speculators by taking the opposite position to the market participants. They can profit from the difference between bids and ask spreads.
Forex trading is profitable only when the profits are protected. Forex hedging is that one way where traders can avoid a loss and protect every profit made. A transaction is implemented to safeguard an existing or an anticipated position of a currency from an unwanted market movement. To avoid loss from an unfavorable exchange rate, forex hedging is used by a wide range of participants, from an investor and a retail trader to a forex broker and even a hedge fund business.
In the process of forex hedging, the trader analyzes the content of the trading page on the browser. It uses tools and browser plugins to extract the information that indicates downside risks. It also uses browser cookies to find a low-risk foreign currency pair. Before conducting the transaction, a forex hedger has to find the content on the page that protects its investment from downside risk. This method is used to long a currency pair.
Similarly, to short a forex pair, the trader needs to use the same browser plugins and cookies to analyze the content on the web page. This content analysis should be directed towards finding information on upside risks from the trading page. The browser cookies can play an important role in the money management strategy of forex hedgers. By protecting the trade from a loss, a forex hedge makes a profit indirectly. Forex hedges are designed to protect profits instead of generating them. Their efficiency in executing stop-loss orders helps a trading account stay profitable in a cost-effective way.
Top 3 Best Forex Trading Strategies
There are several ways in which a forex trader can profit from every single trade made in the forex market. Day traders use the following three strategies on their trades regularly. These strategies offer the highest number of trading opportunities in all markets. Some may require lengthy investment periods, while some may work with short-time investments. Trades can become profitable when these trading plans are implemented with strong technical analysis. Their high risk-to-reward ratio ensures that the trades are likely to turn out highly profitable.
1. Price Action Trading
Price action trading of forex pairs is implemented by studying the historical prices of the currencies. This study is conducted by analyzing the content provided on a trading web page. In this strategy, the information collected by browser cookies is used to formulate a technical trading strategy. Price action is a stand-alone technique that works as an indicator. It is lesser-known in the corporate economic events, but it supports several other trading strategies within the price action bracket.
Price action trading can be used over long, short, and medium terms of time. The trader can run multiple time frames on the browser to analyze the valuable price actions. To determine the support or the resistance levels per trade, an entry or exit point is used. This involves using the Fibonacci retracement technique or browser tools for trend identification, market indicators, and price oscillators. Within the price action range, other strategies can be adhered to.
2. Trend Trading
With trend trading, an investor can leverage the power of the browser app to the maximum. The browser can run a simple process of collecting and assorting all market trends. Based on the user experience level, this forex strategy attempts to churn out positive returns by exploiting the directional momentum of the market. Trend trading is best used for medium to long-term investments. The trends tend to fluctuate in length, and the browser needs more time to collect and assort them. Compared to price action, multiple time frame analysis is more effective in trend trading. In this strategy, the entry point is determined by an oscillator, and the exit point is calculated based on the positive risk-reward ratio. There are stop level distances that help traders equate or exceed the distance towards a positive risk-reward ratio. If the stop level is 50 pips away, then the take profit level is set at 50 pips or further away from the entry point.
3. Swing Trading
This is the number one speculative trading strategy in forex markets. It is used by very few investors and brokers. Based on a swing, trading forex pairs becomes very predictable. This swing is determined when a tradable currency is held for one or more days to analyze its profit from the price changes. These price changes often occur in a to & fro manner, so they are called swings.
Is forex trading profitable during the COVID-19 pandemic?
In 2020, the coronavirus pandemic has impacted the foreign exchange market with a tailspin. In these six months, there has been a considerable boom in the FX trading marketplace. Forex traders have experienced huge returns from short term investments made in the past few months. Advanced trading platforms and browser-based web apps have enabled these traders to register month-to-month growth of 25-50%. Every forex account is reaping massive profits as the market has observed the entry of more than 20 million new clients in 2020. Every new account has been profitable from March through June. Based on the global trading volumes during these months, the profitability of trading forex has increased by approximately 300%, according to IronFX.
Many people open a forex trading account to experience the process of making huge profits in the short term. Every new account has to adopt a money trading strategy, which studies the content and information displayed on the trading web page. Trading forex becomes profitable when this information is used to leverage the trades with a high risk-reward ratio. The process of executing these trades via a trading platform or forex brokers can determine how much profit one can make. In retail forex trading, there is no doubt about the ability of these trades to become profitable. The real question still prevails in the profit-making opportunities for forex traders in the long run.