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5 PRINCIPLES TO MAKE MONEY ON FOREX
Forex, an abbreviated form of foreign exchange, is a fertile market for individuals, especially the low-income, to enter and generate profits. Being considered the largest investment channel with a daily capitalization of US$6.6 trillion as of 2019, forex has unsurprisingly witnessed a surge in new accounts but recorded a vast number of losers. This article will focus on whether you can make money from forex trading and accordingly how to reach that end.
How to Make Money Trading Forex
To find out how incomes are earned in the forex market, you should take a closer look at how it naturally works beforehand. Briefly, forex trading is defined as the process of marketing one currency and simultaneously purchasing another at a certain price. Assuming the exchange rate of the EUR/USD (Euro/ US dollar) is 1.21, hence one euro can be swapped for 1.21 US dollars correspondingly.
In the past, central banks and large commercial banks were the key players in this sphere, whilst only high-net-worth individuals who forged a tremendous relationship with banks were empowered to enter the fray. Although this fact today is unchanged, there is no denying that the forex market is more segmented with the growing involvement of single individuals who trade on behalf of either themselves or clients. For that reason, forex is implicitly classified into two batches: the interbank market and the retail market.
The former is always a commercial arena for large financial institutions that embark on forex trading with a massive capital outlay. Beyond that, dealing desks are often backed up by informative databases to make prudent decisions. Little no wonder that such organizations are often winners in the competition. Inevitably, the aim of banks and other institutional entities holding currencies is not limited to forex trading but extends to other important activities such as reserves or commerce.
You might sometimes participate in trading foreign currencies without noticing. For example, you are going to have a vacation in the United States next week and exchange your host currency for the US dollar in bureaux de change. This case is the simplest form of forex trading. In reality, you can keep wads of foreign currencies for long under some regulations and sell them off when acknowledging their profit potential. Instead of holding cash, you can deposit those instruments to bank accounts or invest in foreign bond funds and exchange-traded funds (ETFs).
However, not many people had sufficient money and patience to invest in foreign currencies in that way. The introduction of software programs, coupled with the advancement of technological devices and the Internet, has opened a golden opportunity for those with low capital to jump into the realm. The retail forex market is formed accordingly.
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How to Make Money Online on Forex
Forex, devoid of further modification, would imply the retail market where individuals speculate on foreign currencies without their holding of such instruments.
After free registration for a trading account, you will be allowed to do paper or real transactions on a trading platform. Whether proprietary or third-party, the software is almost compatible with devices including desktop computers, tablets, or mobile phones. The program gives a full range of functionalities to facilitate your trading activities.
In the forex industry, “buy low and sell high” is among the Number One rules to make money. Due to your physical ownership of no currency pairs, you will bet on the subsequent market movements which may be upward or downward. In case your predictions are precise, the account balance will be added. Otherwise, you would lose money. Thereby, you would open a long or short position that means buying or selling currency pairs at a certain quote.
Take a simple instance: You have US$1,000 and decide to buy a micro lot of the EUR/USD at the price of 1.21629 with hopes for its value appreciation in the future. Should the market be bullish as forecasted and the pair value increases by 10 pips, you will receive a positive profit? The one-pip change for a micro lot equates to US$0.1, hence the net income is US$1 (= US$0.1 x 10 pips). That amount sounds insignificant. So, a broker routinely enables you to use leverage to bolster your buying power multiple times.
In case you pick up the 1:100 leverage ratio, you now have US$100,000 in the account. This means the broker lends you US$99,000 at no interest rate to perform the speculation trade. Suppose you purchase a standard lot of the EUR/USD at the same price and the one-pip movement costs US$10, a 10-pip rise in the pair’s value amounts to US$100. Provided you follow the day trading style and make some similar winning trades within a day, your earnings will be much greater.
This compelling feature tempts various traders to the market yet also accompanies bigger monetary risks. What if the odds are stacked against your expectation? Specifically, when the market is bearish, a 10-pip loss for a micro lot will be equivalent to US$1, whilst that of a standard lot is US$100. Only several losing trades can drain your account balance. This is one of the culprits behind the high washout rate reported by forex brokers every year.
However, that you obtain some winning transactions does not mean your net profit is positive. Due to the use of services provided by brokers, you will be charged some fees, mainly including spreads. If expenses outweigh gross profits, you consequently end up losing money. Therefore, considering what kinds of fees are imposed for trading and non-trading activities would help you calculate how much to earn.
Can You Make Money Trading Forex?
Theoretically, you can make earnings from the forex market, as already mentioned in the previous part. However, higher gains are always inextricably linked to greater pains. That is, currency speculation can either give you a lavish lifestyle or make you face a mountain of debt overnight. The figure of more than 80% of clients failing to reach the winning position has raised doubts among traders and governmental bodies about the profitability of forex trading. Even some consider this investment channel nothing short of gambling.
Nevertheless, the remaining share of roughly 20% proves that there are several winners or at least those ending in draws. No secrets are hidden behind their achievements, but rather their compliance with several key principles as follows:
Establish a Clear Trading Plan
Like nine-to-five occupations, you need a proper plan that should tally up with your trading goals and capabilities regardless of experience. Answering which lifestyle you long to pursue beforehand, for example, earning much more than what office jobs give you or buying luxury sports cars, you would identify the final destination in this forex career path. Accordingly, a trading plan would be devised. It entails selected currency pairs, entry and exit strategies, leverage and many more.
However, the market is constantly changing with unprecedented variables, a too detailed plan can render you hesitant to perform trading activities and miss ripe opportunities to make money.
Stick to Discipline and Be Patient
Many individuals rush to the forex market for fast returns but often get overwhelmed by strong market movements and high monetary risks. Little wonder that they are then under psychological pressure and eventually prone to failure. So, novices are highly recommended to gradually get familiar with the forex market through demo accounts or nano lots. More importantly, they should teach themselves to be self-disciplined and patient, even over heavily volatile times. Equanimity, coupled with proper trading plans and experience, helps them find ways to pull off.
Build Trading Experience
Seldom does a forex newcomer who has no accumulated skills and experience with investment practices win the game, not to mention making a handsome income. Research has shown that savvy traders achieve a higher success ratio than the inexperienced because the former gains sufficient experience and essential skills to deal with unexpected market shifts as well as make a sensible decisions.
Choose a Good Brokerage Company
To be eligible for trading forex assets, individuals – whether professional or amateur – need to cooperate with an institutional mediator that functions as either a pure broker or dealer. Because various scammers exploit the deregulated nature of the forex market to trick the naive, novices are regularly advised to open an account with reputable brokers whose operations are under the supervision of competent authorities. Choosing a reliable company is among the top priorities to avoid losing money in the forex market.
Never Put All Eggs in One Basket
Even the greatest traders or investors hardly guarantee their success in only one investment channel the whole time. Diversifying your streams of income, capital for financial instruments or risks is a common rule followed by professional and veteran traders.
Don’t Stop Learning
The learning curve of forex trading is extremely steep. Any occupations require your continuous upgrade for the latest knowledge and skills. Forex trading is not an exception, especially when you treat this realm seriously but not as a means for recreation. The better you understand the market, the higher the possibility of success is.
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