How can you make money by trading in Forex?
Making money by investing is great. The excitement is hard to describe and the possibilities are almost endless. The feeling of a successful investment is unique and once you understand the system behind Forex trading, it can be profitable as well. But how can you actually make money with Forex?
Earn money with Forex: The basics
The basics of making money with Forex investing are actually simple. The answer to the question “how to make money with Forex” is therefore “by buying or selling currencies at the right moment”. The price of a currency compared to another currency is constantly fluctuating: this happens because the currency is getting more or less valuable relative to the other currency.
But how can you trade Forex? Do you have to go to a foreign exchange office at the airport? No, fortunately not! Nowadays, everybody can trade currencies with a broker. A broker is an intermediary which makes it possible to trade currencies and other financial securities. Opening an account is usually free of charge and, by means of a demo, you can try out if you can earn money with Forex.
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Currencies are always represented as a ratio when you start trading Forex. For example, when trading EUR/USD you are buying or selling euros for dollars. If the rate is, for example, 1.2, this means that for every euro you receive 1.2 dollars. If the ratio subsequently becomes 1.21 you will make a price profit.
Long and short
When trading Forex via CFDs, there are basically two ways in which you can open a trade. The first is to buy or go long and the second is to sell or go short.
If you open a long position, you will earn money when the price goes up. If you take out a short position, you’ll earn money when the price goes down. When you think that the price is going to rise, you’ll go long and if you think that the price is going to drop, you’ll go short.
Before you can really start trading Forex by using CFDs, you need to know more about the underlying mechanisms. In the Forex information category you can read more about the price-setting mechanisms, and investing in Forex in general.
How to make money with Forex?
You only make money on your Forex position after it has been closed. Your broker constantly keeps track of the result of your open trades. If you have bought EUR/USD and the euro has risen in value, you will have a paper profit.
Only after you have closed the position, this profit become final. The same applies to losses: your open investment position may be loss-making now, but this can turn around at any time.
You only earn money that you can withdraw when you close a profitable Forex position on your investment platform.
Opening a Forex Position
At your broker you can often open a Forex position with one click. Within the Forex trading software, you’ll often see a bid and an ask price.
- The bid price is the price at which the broker wants to buy the Forex pair.
- The offer price is the price at which the broker wants to sell the Forex pair.
There is always a difference between the bid and the offer price: this difference is called the spread. Exotic Forex pairs (the less traded ones) often have wider spreads, while well-known pairs such as EUR/USD are cheaper to trade.
Can you become rich with Forex?
Whether you can become rich with Forex, depends very much on your definition of being rich. When you look at the Fortune 500, for example, you won’t see people who have obtained their fortune by actively trading on the Forex market.
On the Internet, you sometimes read wild stories with great promises: returns of 20 per cent or more per month are sometimes promised. If this were possible, you would own a million after a bit more than 4 years, if you start with an amount of 10,000. If it were really that easy, there would be more Forex millionaires.
In practice, you will see that the vast majority of investors who start trading Forex make a loss. Only 10 to 40 percent of the investors succeed in trading Forex profitably, depending on the moment in time. An even smaller percentage is successful enough to make a living out of it.
If you have enough perseverance, and you study the markets extensively, you can certainly make money with Forex. You will be rich in the sense that you can work anywhere in the world and nobody will tell you what you can or cannot do. Nevertheless, it is important to have realistic expectations: everything is possible, but whether you will succeed… that is the question.
Keep an eye on the costs
When you start trading Forex, costs are critical. You probably start trading Forex because you want to earn money, not because you want to fill the broker’s treasuries. Therefore, it is important to keep an eye on the costs.
When you invest in shares, you often do this a few times a month or even a year. Forex trading is more active: on one day you often open many positions. The transaction costs per investment are then lower, but because you open more positions you still lose a lot in costs.
If you want to make money with Forex, it is therefore important to keep an extra eye on the fees of your investments.
If you want to become successful with Forex, it is important to manage your risks well. You should aim to make money in more than 50% of the cases to reach break-even. This is necessary because the broker also takes a small amount of transaction costs out of every trade.
It is often best to bet or trade with a favourable ratio of potential profit to potential risk. This means that you should only open a Forex position when your potential profit is higher than your potential loss.
This is the case, for instance, if the price is 1,2, and you see that the next level at which the price often bounces is 1,22. You can then set a take profit (the moment at which you automatically take your profit) at this value. If you see that when the price goes through 1,19, it often continues to drop further, you can set your stop loss here. Your ratio between your potential profit and loss will then be 2:1.
By cleverly managing your risks in this way, you increase the risk/return ratio of your investment. This way you can earn money faster with your Forex investments.
What makes Forex trading attractive?
Investing in Forex is attractive because of the high trading volume. This makes it difficult for parties to manipulate the market and therefore the prices moves more predictably. Moreover, because you can take a short position, you can profit under all market conditions: this way you can make money even in case of negative news.
A smart Forex trader in any case keeps a close eye on the news. When interest rates in the Eurozone have raised, for instance, it is more attractive to own Euros. This may positively influence the exchange rate of the euro against the dollar. Remember that much of the news is already incorporated into the exchange rate: you will therefore really have to make predictions about the future, which is very difficult.
Do you want to earn more with leverage?
You can also use leverage when trading Forex. Leverage theoretically allows you to make more money. This is because you can magnify a small price movement. If you invest with $1,000, you can open a position for as much as $30,000 on a currency pair such as EUR/USD. When the price rises by 1%, you will have a positive result of 30%.
It is important to be careful with leverage. It is precisely when you use leverage that you will see many investors lose their money. This is because your losses are much more severe, which means that you can quickly lose a considerable amount of money.
How much money do you need?
You can trade Forex from as little as $100. In most cases, this is not very profitable: if you really want to earn serious money with Forex, you need more money.
Within a good Forex strategy, you’ll never lose more than a certain percentage on your trades. For instance, if you don’t want to lose more than 1% per trade, then with a deposit of $1000 you can only lose $10 per position. You can determine the amount you’re going to earn or lose by adjusting the size of the lots you trade with.
At most brokers, the smallest Forex lot you can trade is $1000. A full lot refers to $100,000.
Watch out for slippage
When you start investing in Forex, it is important to take slippage into account. When the market is very volatile, sometimes your stop loss order is not executed at the value you have set. This can suddenly cause your losses to increase further.
You can use a guaranteed stop loss at some brokers. However, you often have to pay extra commission for this, so you should only use this guaranteed stop in volatile market conditions.
How much money can you earn with Forex?
The great thing about Forex is that it is a 24-hour market: there is always and everywhere in the world someone who wants to exchange money. This means that you can decide for yourself when to trade in Forex. Before you start trading Forex, you may want to know how much money you can earn.
This depends entirely on your skills, the market conditions and your investment. You can make estimates in advance based on the risks you are prepared to take. Even better is to first try out your strategy with a demo. That way you will discover by yourself how much money you can potentially earn with Forex.