Forex trading volumes continue to expand, with daily turnover exceeding $7.5 trillion, on track to reach $10.0 trillion this decade. The Forex market is a decentralized over the counter (OTC) market. It is accepted as the most liquid market and is operational 24/5. The highly leveraged Forex market attracts scores of new Forex traders daily, but how do Forex traders make money?
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Our review will outline how new traders should approach the Forex market, ensure they understand what Forex trading is and is not, outline Forex trading facts, and discuss strategies for beginners to explore.
How Forex Traders Make Money the Facts
Before diving into strategies, beginners should know facts. They may appear discouraging, but an informed trader is a smart trader, and a smart trader in turn is more likely to be a profitable trader. Rather than viewing the facts as a negative, consider how you can benefit from them, and structure your trading approach accordingly, and avoid the traps of Forex trading.
Forex trading facts:
1. The Forex market operates 24/5, but trading during select periods results in more profit potential, which we will cover later. Therefore, you can trade Forex whenever you like, but remember that it may not necessarily be profitable to do so.
2. 70% to 90% of retail Forex traders lose money, while roughly 2% of retail Forex traders trade for a living successfully, but around 10% earn enough to justify the investment, time, money, and effort.
3. 80%+ of daily Forex trading volume is algorithmic, and many retail traders find they face an uphill battle trading against algorithms that are increasingly powered by machine learning and artificial intelligence solutions. Speed can be critical, the time it might take a retail trader to open their Forex platform, algorithmic traders could have performed analysis selected a strategy and entered their positions, and already booked their profits.
4. Most retail Forex traders fail to respect Forex trading as a highly skilled profession that requires in-depth education and years of practical experience. They approach it with a hobby mentality, liken it to gambling with binary outcomes, and complain about their trading losses. Before considering opening and funding a trading account, traders should ensure they spend the necessary time on high-quality education, available largely for free online.
5. Many Forex traders and regulators fail to understand the importance of risk management and its relationship to leverage. Leverage is an excellent trading tool, and the Forex market thrives on it. Leverage can magnify profits and losses exponentially. The key aspect to understand is that leverage itself does not cause trading losses, but the absence of risk management does. Irrelevant to the leverage a trader uses, a 2% loss is a 2% loss, where leverage shortens the number of pips that a trade moves against the trader before reaching the drawdown limit of 2%.
What is Forex Trading?
Understanding what Forex trading is and is not, is yet another crucial step in learning how Forex traders make money.
Forex trading is:
- Buying and selling, or exchanging, one currency for another
- Conducted via currency pairs, where the first currency is the base currency and the second one is the quote currency, for example, the EUR/USD
- A highly skilled profession just like an engineer, a lawyer, a doctor, a physicist, or a mathematician, you need to study to be effective.
- Open 24/7 in a decentralized market
- The most liquid financial market
- An opportunity to earn money with lower capital requirements versus other asset classes.
- A potential means to earn active and passive income.
- Necessary for the global economy to function
- Dominated by algorithmic trading, machine learning, and artificial intelligence solutions.
- Filled with scams and frauds at the retail end of the market – so beware.
Forex trading is not:
- A get-rich-quick scheme.
- Gambling
- A market where a hobby attitude can yield consistent profits.
- A market for uneducated beginners
- An opportunity to earn money without experience and patience.
How Should Beginners Approach Forex Trading?
All beginners should start with a high-quality education. This can ensure they understand the market mechanics and allows them to spot scams and frauds. An educated Forex trader will know what to look for, where to find it, how to create or develop it, and how to achieve consistent and set realistic trading goals.
Here are essential tips for Forex beginners:
- Master trading psychology
- Trade free of emotions
- Use demo accounts to learn but understand their limitations.
- Keep a trading journal to self-evaluate your actions.
- Trade from a quiet place free of distractions
- Have realistic expectations (most professionals earn between 10% to 15% annually)
- Create a deposit strategy (a one-and-done approach is neither effective nor efficient)
- Develop a risk management strategy and execute it.
- Use a trading strategy that suits your personality and personal strengths.
How Forex Traders Make Money - Strategies and Must-Knows
Let us touch on three must-knows if you want to make money trading Forex and cover the ways you can get started.
Three Forex must-knows:
1. Trading fees directly impact profitability. Costs for major currency pairs during the London-New York overlap session exceeding $7.00 per round lot are expensive.
2. Trading during overlap sessions, when operating hours of core financial centers overlap, yields the deepest liquidity and lowest fees through spread compression (due to shear number of participants) during each trading session.
3. Trade when the pros trade and pause when retail traders trade.
Here is an overview of Forex strategies traders should consider:
- Scalping - Best used on M1 charts to capture a few pips micromovements.
- Short-term trading - Ideal for M5 to H1 charts
- Day trading - Good on H1 to D1 charts
- Copy trading - For traders who wish to follow numerous strategies.
- Signal providers - For manual traders
- Account management - A traditional approach to portfolio management, have your account managed by someone else.
- Passive income - For affiliates and SEO marketers
Bottom Line
Forex traders have multiple ways to earn money from the Forex market, but they should start with high-quality education and respect the Forex market as the highly skilled and often stressful career it is at times.
