How to make money trading Forex
Can I really make money trading online?
Since there is no certainty in online Forex trading, it is vital to approach the trading platform with common sense, level-headedness, and a practical mindset. It takes practice, patience, and a certain skill set to earn money online from your orders, including clear-sighted market knowledge that will allow you to tip the balance ratio of wins to losses in your favour.
What is Forex, and how does it work?
Forex is an abbreviation of Foreign Exchange. It describes the conversion of one currency into another and refers to the global financial market, where currencies are traded online around the clock.
Thousands of people buy and sell currencies without notice, while professional traders consciously benefit from it. When exchanging money, you can earn on the difference in currency rates between the moments you buy and sell a particular currency. The same process applies to corporations that exchange much more significant amounts, creating supply and demand for a particular currency.
Supply and demand can move market prices: when the world needs more euros, the price of the euro increases, and when too many dollars are circulating, the price drops. To balance the market, central banks regulate the overall volume of their national currencies by adjusting the refinancing rate. That's why traders constantly monitor world news.
Individual traders can buy and sell currency pairs on trading platforms provided by Forex brokers. Reliable brokers such as Octa offer the necessary level of security on their platform, allowing traders to be confident about their funds.
To learn more about the main aspects of Forex trading in an accessible and convenient format, watch video lessons from our Forex trading course.
How do traders make money?
Profiting from Forex trading involves accurately predicting the price movements of currency pairs and strategically opening positions. For instance, if you anticipate a decline in value for a particular currency pair, you can adopt a short position to benefit from a falling market. On the other hand, if you believe a pair's value will rise, you can opt for a long position to capitalise on an upward market trend. To profit from your order, you have to close the position after the price of an asset has moved in the direction you anticipated.
How do traders lose money?
Forex traders lose money mainly by trading too aggressively, focusing on a momentary gain, overtrading, and second-guessing. Without proper risk management, focus, and a detailed plan, you will most likely take many losses. To trade with a profit, you must focus on maintaining the capital you already have, sticking to the chosen strategy, cutting losses, and not switching back and forth between different approaches.
Tips on how to avoid losing money on Forex
Monitor market sentiment
Market sentiment is the general prevailing attitude towards a particular security or larger financial market based on various fundamental and technical factors, such as price history, economic reports, seasonal factors, and national and world events. When investors expect upward price movement in the stock market, the sentiment is bullish, and when they expect the price to move downwards, the sentiment is bearish.
To measure market sentiment, investors and analysts use tools called indicators. Some of the most popular indicators are the Volatility Index (VIX), Bullish Percent Index (BPI), and moving averages (MA). Knowing these indicators, you can better understand the market's behaviour and make informed decisions.
Create and follow an effective trading strategy
An effective trading strategy is crucial for achieving success in the financial markets. A well-defined strategy provides a structured approach to decision-making, helping traders navigate the complexities of trading.
Firstly, setting clear goals and defining the desired outcomes is essential: you must articulate what you want and how you will do it. Your primary focus points can be capital preservation, steady income, or long-term growth.
Next, a thorough analysis of market trends, technical indicators, and fundamental factors helps identify potential opportunities and risks. With this knowledge, traders can develop specific rules to manage risk effectively, including stop loss and take profit levels. Manage your risks by position sizing and diversification. This will help you protect your trading capital and minimise losses.
Lastly, be consistent and avoid making any emotional or impulsive decisions. At the same time, remember to adapt and improve your strategy by regularly reviewing and adjusting it. If you see your results improve over a long period, that means your strategy works.
You can always test your strategy by trading on a demo account with simulated funds, which means a great practice without any risks.
Use leverage wisely
Leverage trading in Forex involves borrowing funds from the broker, directly impacting potential profits and risk exposure. That means that leverage allows traders to control larger positions with a smaller amount of capital but, at the same time, increases the risk of losses. To use leverage effectively, stick to an effective risk management strategy, keep margin requirements in check, and utilise the trading calculator to determine the optimal leverage ratio. You can also use our educational materials on leverage trading to limit future risks and improve your trading.
Create your risk management plan
No matter which financial instrument you choose to trade, always apply risk management to keep your losses to a minimum. It primarily requires discipline and limiting your risk on orders to no more than 1% of capital per order. If you manage your risks correctly, you will be okay even when incurring losses on individual orders, as it will not significantly impact your account.
It is also essential to protect your account using stop-loss and take-profit orders, which automatically close the order when the predetermined level is reached. Stop loss and take profit are excellent for cutting your losses and preventing an order from taking a potentially dangerous turn.
Avoid emotional trading
Emotional traders, often beginners, tend to trade with emotions such as anger, fear, hope, or faith. When experiencing these emotions, traders may start to believe that the market is against them, leading them to fear the market and view it as dangerous and challenging. Instead of focusing on the return percentage, they focus on having a high win percentage, which ultimately results in them making impulsive decisions.
Emotional trading is a surefire way to lose out during currency trading. It leads to a distorted perception of the market and the inaccurate execution of orders. If you feel like you are beginning to trade on emotion, step away from the platform until you have a clear mind. Review your risk management plan and trading strategy, and stay consistent. Only then should you consider re-entering the Forex trading platform and placing more orders.
