Often, many people of vastly different backgrounds come into the Forex trading scene, in hopes of getting rich overnight. These potential traders are inspired by the profits made by some of the famous Forex traders with hopes that they are able to strike it big in the Forex market. Out of all who try trading, there would only be a handful of such traders, with time, skill and hard work, that would eventually succeed in the long term. So, can you get rich by trading Forex?
It depends. While there is a probability of earning a decent income by trading in the Forex market, the chances of you getting rich are pretty low. You should not expect to get rich overnight. Forex is not a get rich quick scheme that requires low capital, so you would really need to work hard and build up your skills.
Today, we shall discuss how you are able to possibly a decent income by trading Forex. You would get to understand further what it takes to trade Forex more skilfully before you have a chance to succeed here.
Table of Contents
Landing your Forex Trading Expectations
Risk and Volatility
The volatility of a currency represents the unpredictability of fluctuation of that currency’s exchange rate in the market. The volatility results in you either making profits or losses when you are trading Forex, thus it is the main risk when it comes to trading Forex.
While higher volatility can mean that there is a greater amount of risk involved when trading, it can also present more opportunities for you to profit. You would need to vary your risk management techniques, as well as your trading algorithms, based on the volatility of the market.
The majority of the volume of currencies are traded within the interbank market. Here, different commercial and investment banks would be trading currencies together via electronic networks. Most of the total volume traded is accounted for by major banks who facilitate Forex transactions, as well as make speculative trades.
Central banks, representing the government of that respective country, are in charge of fixing the price of their own currency on the Forex market.
These players in the Forex market have advantages in terms of having information and the fluctuation of prices. You would thus be competing against the major banks when trading Forex.
How much capital do you need to start trading in Forex?
For most people, you are able to start trading with at least $100 or $200 USD in your account. While you should always feel comfortable with the amount you are trading, $200 would seriously limit your ability to trade and you would only be making minor profits when you trade.
We would suggest that you start trading with a higher amount in your account, starting from the thousands. While that is not a small amount, you should already have sufficient savings before you start trading in Forex. Having to trade a decent amount of money would mean that you would be able to have more profits to compensate for your time spent trading.
Progressing as a Forex Trader
Demo Trading and Practice
Before you start trading in the actual market, you should familiarize yourself with trading using a demo account. This would let you experience trading without actually having to use any money yet, so you would have a chance to understand the functions of the trading platform just in case you mess up in the actual market.
Even as an experienced trader, it is still a good idea to do demo trading if you are switching between trading platforms. This would help you to master the features of your platform in order to perform better.
Transitioning into a Small Live Account
While you should have a decent amount of money in your trading account, you should not pump that money in random trades and hope you can profit from there. You should start trading small before you gradually increase the amount of money you are investing in. You can increase in small percentages of 2% to 4% until you feel comfortable with the amount you are trading with.
Risk and Money Management
Risk Management in Forex means how your actions are able to help protect you against a trade when it loses. While a greater risk would result in a higher probability of better profits, you may also suffer great losses. Risk Management aims to manage the level of risk in order for you to profit more while losing less.
Assuming that you have $10,000 in your account, having a 1% risk per trade would mean that you would have a maximum loss of $100 for every trade. This way, it would only take 100 trades before your account is being wiped out. While this is unlikely, this is an example of how risk management is crucial when you are trading Forex.
While risk management is perhaps the most crucial factor when it comes to succeeding in the Forex market, you would also need to use leverage properly in order to succeed in the long run. Leverage is related to risk management as leverage is simply trading with more money than the amount in your account. You would also need to use risk management if you intend to use leverage to help you when trading.
Importance of Backtesting
Backtesting means that you are making use of historical data to test current trading strategies. This would allow you to assess its performance back then. Theoretically, successful systems that have worked in the past would still work in the future. You are able to do backtesting either using algorithms or doing it manually.
Assuming that you are doing backtesting manually, you would possibly be analyzing charts on paper. This is rather difficult if you are going to determine certain points on a chart and is time-consuming as well. Here, we would recommend that if you are interested in doing backtesting, you should go for an automatic system for more efficiency. However, it may cost more, or if you are coding it by yourself, it may take more time.
Having a Trading Journal
The trading journal is simply a log in which you will state every single one of your trades, similar to an inventory when doing business. Having a journal will help you in improving your techniques by using your past experiences. Many traders initially struggle with keeping the journal, but logging every day would help to make your trading more consistent. It would make you accountable for your trades while helping to improve your trading as a whole.
You are able to create a trading journal by using an Excel sheet or spreadsheet on your computer. You should include crucial details of your trades, such as the date of trade, the currency pair that you are trading, as well as the size of your trade. Feel free to add more information to your journal, as well as keep remarks on the trade.
Your trading journal would help you to work out better Forex strategies since they too deteriorate with time. You are able to use your trading journal to monitor your trading strategies using the following:
- The number of trades: Ensure that your profits are not by sheer randomness.
- Expected Payoff: The net profit over the number of trades, which is the average profit per trade.
- Profit Factor: The gross profit over gross loss, which is how much you profit for every dollar lost.
- % Positions Won: This depends on your TP/SL ratio, but varies as you may not be able to profit if calculated wrongly.
- Relative Drawdown: This varies by the number of lots and needs to be calculated correctly as well.
- Recovery Factor: The net profit over maximum drawdown.
Frequently Asked Questions (FAQs)
Is Forex a gamble?
While some might argue that it is, the answer is no.
While trading in the Forex market involves speculation and has some randomness involved, it does not necessarily mean that you trading in the Forex market would be “gambling”. If you gamble in a casino, you would definitely know that the casino has a higher probability of winning above anyone else, so your chances of profiting in the long run are essentially zero. However, when you trade in the Forex market, the chances of you having a profit could be higher.
While you are trading in the Forex market, you are speculating on the possibility of your trade, which may result in a win or a loss. While Forex involves uncertainty, it is more of a series of educated guesses rather than conventional casino gambling.
Who is the richest Forex trader?
There are quite a number of rich Forex traders who have succeeded by trading in the Forex market over the years. We’ll just briefly talk about two of them and what they have done to strike it big in Forex trading.
One of the best Forex traders would be the former Chairman of the NYSE, Paul Tudor Jones. With a net worth of an estimated $4.5 billion USD, he is one of the richest traders of all time. His best trade came when he shorted the market crash of October 1987, having a profit of 62% with only short positions. In the same year, he helped his own firm earn $100 million USD.
Another such person would be Andrew Kreiger. He was famous for being an aggressive trader who was granted a trading limit of $700 million instead of the usual $50 million. He spotted that the NZD would be greatly overvalued after the market crash of October 1987, before going short on the NZD with a 400:1 leverage. The NZD moved 5% against the USD within a few hours, which Kreiger helped his company profit $300 million.
How long does it take to learn Forex?
The time taken to learn Forex would vary for everyone, but most people would take a few days to a few weeks to learn the main concepts of trading Forex. However, it would take months, or even years, to fully experience trading in the Forex market and to fully understand it.
When trading in the Forex market, you would never stop learning. As you trade everyday, you continue to learn more about how to trade better and more successfully. You are able to learn differently, be it by reading guides, or by experiencing trading yourself. Ultimately, there would never be an end to learning about Forex.