How to make money trading forex?
Did you know that it is possible to make money by buying and selling currencies? This is also known as Forex trading. In this article, we will discuss how to make money with Forex.
Note: Trading Forex is very risky! Most investors end up losing money.
How to make money with Forex?
When you trade Forex, you trade in currencies. Currencies such as the euro or the dollar constantly fluctuate in value. By buying a certain currency at the right time, you can make a profit through price gains. For example, if you buy the dollar before it increases in value, you will make a profit.
But how can you trade Forex? Do you visit to a currency exchange at the airport? No! You can actively trade Forex with an online broker. Do you want to try trading Forex yourself without any risk? You can do this with a demo! Use the button below and discover where you can trade Forex with a demo:
When and how do you trade Forex?
After opening an account with a Forex broker, you can start trading currency pairs immediately. Unlike stock markets, the Forex market is open 24 hours a day, 7 days a week.
However, the trading volumes vary greatly: the volume during the London and New York sessions is the highest. As an active trader, this can be an interesting time to trade.
Example of making money with Forex
You trade with €10,000 in EUR/USD. Suppose the EUR/USD rate rises from 1 to 1.1. This means that you would receive $10,000 for €10,000 initially, and now you receive $11,000.
By opening a position in EUR/USD, you could earn a 10% profit. It is also possible to use leverage to increase the profit up to 300%! However, keep in mind that if you make the wrong decision, this profit can easily turn into a large loss.
Are you interested in Forex trading? Keep reading to learn the basics so you can start trading yourself!
Reading & understanding currency pairs
When you trade Forex, currencies are always displayed as a ratio. This is because the value of a currency always has to be displayed in another currency. For example, you trade in EUR/USD (the value of the euro quoted in dollars).
When you trade in EUR/USD, you buy or sell euros for dollars. When the rate is, for example, 1.2, this means that you receive 1.2 dollars for every euro.
Long and short positions in Forex
When investing in Forex, there are actually two methods to open an investment. The first is to buy or go long, and the second option is to sell or go short.
When you go long on a trading position, you speculate on a rising price. If you open a short position, you speculate on a declining price. If you think the price will rise, you go long, and if you think the price will fall, you go short.
How are your trading results determined?
Your broker constantly keeps track of the result of your open investments. If you bought EUR/USD and the euro increased in value, you have a paper profit.
The profit only becomes final after you close the position. The same applies to losses: your open investment position may be at a loss, but this can change at any time.
You only earn money that you can withdraw when you close a profitable Forex position on your investment platform. Note that you can lose the entire amount in your investment account if your open positions are all at a significant loss. You will then be faced with a margin call.
Opening a Forex position
You can often open a Forex position with a mouse click at your broker. Within the Forex trading software, you see a bid and an ask price.
- The bid price is the price at which you can sell a currency pair.
- The ask price is the price at which you can buy a currency pair.
There is always a difference between the bid and ask prices: this difference is also called the spread. Exotic Forex pairs (the less traded ones) typically have a wider spread, while well-known pairs such as EUR/USD are cheaper to trade.
The spread is part of the costs of Forex trading.
Monitor the costs of Forex
When investing in Forex, costs are vital. You probably started Forex trading because you want to earn money, not because you would like to fill the broker’s pockets. Therefore, as a Forex investor, it is extra important to keep a close eye on costs.
When investing in stocks, you do this often several times a month or even a year. Forex trading is more active: you typically open many positions in one day. The transaction costs per investment are lower, but because you open so many positions, you still lose a lot in costs.
If you want to earn money with Forex, it is essential to keep a close eye on the costs of your investments.
Managing Risks
If you hope to be successful with Forex, it is essential to manage your risks well. You must ensure that for every $ 0.50 of loss, you make slightly more profit to break even. The broker also charges a small amount of transaction fees on each trade.
It is best to focus on trades with a favourable ratio between potential profit and potential risk. This means that you only open a Forex position when your potential profit is higher than your potential loss.
For example, this is the case when the exchange rate is 1.2, and you see that the next level from which the exchange rate often bounces off is at 1.22. You can then set a take profit (the moment when you automatically take your profit) at this value. If you see that when the price drops below 1.19, the exchange rate frequently continues to fall, you can set your stop loss here. Your ratio between potential profit and loss is then 2:1.
By managing your risks wsely, you increase the risk-return ratio of your trade. This increases the chance that you can make money trading Forex.
Using Leverage in Forex Trading
You can also use leverage in Forex trading. With leverage, you can increase the amount of your investment. When you invest $ 1000, with a leverage of 1:30, you can open a position on a currency pair like EUR/USD for up to $ 30,000. If the exchange rate then rises by 1%, you will achieve a positive result of 30%.
It is important to be careful with leverage. It is precisely by using leverage that many investors make mistakes, since your losses also accumulate much faster.
Tip: Watch Out for Slippage!
When investing in Forex, it is essential to consider slippage. When the market is very volatile, your stop loss order may not be executed at your set value. This can cause your losses to suddenly increase.
With some brokers, you can use a guaranteed stop loss. You often pay an extra commission for this, so you should only use this guaranteed stop loss under volatile market conditions.
Conclusion: Can You Make Money with Forex?
You can definitely make money with trading Forex. However, hardly any people can trade Forex profitably for several years. To truly succeed, you need a substantial amount of money; therefore, many private investors use a high leverage. A higher leverage also means higher risks, increasing the chance of losing your investment. Ultimately, only a few people consistently make money with Forex.
If you want to make money with Forex, it is wise to keep the following in mind:
- Unexpected events: Decisions by central banks and governments can suddenly cause the exchange rate to rise or fall significantly.
- High volatility: With a 10% increase in the exchange rate with a leverage of 1:30, you can either make a profit of 300% in one go or lose all your money.
- Poor strategy: Many private investors use a risky strategy where they hold losing positions open for a long time.
- Disruptions: When your Forex broker has an outage, it may mean that you cannot close a losing position on time.
- Unfair competition: Large banks have much more information and can also influence/manipulate the market.
Do you dare to invest in Forex despite all these risks? Click here to open a free demo account with a broker.
Frequently Asked Questions About Making Money with Forex
How much you can earn with Forex depends on your skills, market conditions, and your investment. You can estimate your risks in advance based on the risks you are willing to take. It is even better to first test your strategy with a demo account.
{q}Can you get rich with Forex?{/q}
{a}Whether you can get rich with Forex depends heavily on your definition of being rich. For example, if you look at the Quote 500, you will not see anyone who has acquired their wealth by actively trading on the Forex market.
On the internet, you sometimes read wild stories with big promises: think of monthly returns of 20% or more. If this were possible, you would own a million dollar after just over four years if you start investing with an amount of $10,000. If it were really that easy, there would be more Forex millionaires in the world.
In practice, you see that the vast majority of investors who start with Forex lose money. Only 10 to 40 percent of investors can trade Forex profitably, depending on the period. An even smaller percentage of them are successful enough to make a living from it.
If you have enough perseverance, and you study the markets extensively, you can definitely make money with Forex. You are then rich in the sense that you can work from anywhere in the world and that nobody tells you what you can or cannot do. However, it is important to have realistic expectations: anything is possible, but whether you can achieve it… that is the question.
You can start trading Forex with as little as $100. However, in most cases, this is not very profitable. If you want to earn serious money with Forex, you need more capital.
Within a good Forex strategy, you never lose more than a certain percentage on your trades. For example, if you do not want to lose more than 1% per trade, you can only lose $10 per position with a deposit of $1,000. You can determine the amount you earn or lose by setting the lot size with which you trade.
At most brokers, the smallest Forex lot size you can trade is $1,000. A full lot is $100,000.
Forex trading is attractive because of its high trading volume. The high trading volume makes it difficult for parties to manipulate the exchange rate.
Speculators also like that they can open both long and short positions. This allows you to quickly respond to the latest market developments.
A smart Forex trader always keeps an eye on the news. For example, if interest rates in the Eurozone are raised, it is more attractive to hold euros. This can have a positive effect on the exchange rate of the euro against, for example, the dollar. Remember, however, that much of the news is already reflected in the price: you will really have to make predictions about the future, which is very difficult.
This is difficult to say: how risky Forex or stock trading is depends largely on the strategy you use. Many investors buy stocks for the long term, which is less risky than active trading. If you use a high leverage, the smallest fluctuations in the Forex market can have a big impact on your results. Ultimately, trading is always riskier than investing for the long term.
Auteur
Over Alex Mostert
When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.
