There’s a lot of buzz regarding trading currency and the type of profit to be had if you know what you’re doing. A lot of people have tried their hand at forex trading from part-time traders to major companies, but is it really possible for the average Joe to make serious cash? How hard is it to make a decent profit with forex trading?
How Forex Trading Works
When you trade in this market, the currencies come in pairs. The trader will predict how currency rates between the two types of currency will change. If the trader thinks that the American dollar will increase over the pound then they’ll buy dollars. If the trader is right, as the value of the currency they purchased increases they can sell it in order to make a profit.
Forex trading is open twenty-four hours a day, which is one of the reasons this type of currency trading is so popular.
But forex is pretty risky. So risky in fact that many pros have compared it to gambling, insisting that it’s almost impossible to predict currency movements.
There are several books, guides, platforms and tutorials out there, all designed to teach you how to trade like an expert and make a small fortune. However, if you spend any time browsing forex forums you’ll find that many amateur and pro traders lose quite a bit of money daily. Many new traders also choose to buy forex signals in an attempt to get an edge over other traders in the market. And with the right signal system you can make a profit, but using this type of trading method won’t teach you how to read the market trends on your own.
Making these currency transactions can also be expensive and most individual traders simply don’t have enough money to make serious profits.
If you’re serious about investing in currency trading, there are plenty of financial advisors and stockbrokers out there that will explain the degrees of risk and help you to make wise trading decisions, but most people who try out forex do so as a way to get ahead in their financial situation, which means they don’t have the funds to pay for professional guidance. Individuals who trade in forex are mainly self-taught, which is why trading is so risky for many.
Trading Isn’t for Everyone
Before you decide to trade you should consider your level of experience and investment objectives. Unlike stocks, currency trading doesn’t take place on a regulated exchange. There aren’t any clearing houses to guarantee trades or a central governing body. For those used to structured trading environments, the forex market can be a little bewildering.
Forex traders must cooperate and compete with each other, so this self-regulation actually works as a type of effective control over the market.
The forex market is much different from other markets in other ways, as an example, with forex trading, there’s no uptick trading like there is with stocks. Unlike in futures, there’s also no limit on the size of the trader’s position. With forex, there’s no such thing as insider trading.
Forex is considered the most fluid and liquid market in the world, trading twenty-four hours a day with rarely any gaps in price. The market’s scope and size are what makes it the most accessible market in the world.
Broker Commissions in the Forex Trade
Investors who trade in options, futures, or stocks commonly use a broker who will act as their agent in transactions. The broker will receive instructions from their client and take it to an exchange to execute the orders. They receive a commission when their client sells and buys.
But the forex market doesn’t have commissions, it’s a principals only market. Forex firms don’t consist of brokers, instead, they’re dealers. A dealer will not charge a commission, they make their money through bid-ask spreads.
In the forex market, investors can’t sell at the offer or buy on the bid like in markets that are exchange based. There are no commissions or additional fees once the price clears the cost of the spread. Every dollar earned is total profit to the investor. However, the fact that traders have to overcome the ask/bid spread makes scalping much more complicated.
What You’re Selling in the FX Market
In the forex market, you’re not really selling anything. It’s a purely speculative market. There won’t be any physical exchange of currency, instead, these trades exist as computer entries.
So, why does the forex market even exist?
The forex market exists in order to facilitate currency exchanges for multinational corporations that must continually trade currencies. Day to day, these corporate needs account for only twenty percent of market volume. Eighty percent of the trades are put on by multibillion dollar hedge funds or large financial institutions.
Currencies that are Commonly Traded
While some will trade exotic currencies such as the Czech koruna, most will trade the seven most liquid currencies in the world. The four major currencies include the Euro, USD, British pound, and the Swiss franc.
The three commodity pairs include the USD/AUD, USD/CAD, and NZD/USD.
These currency pairs account for about ninety-five percent of all speculative trading in the market.
How to Successfully Trade Currency
A trader who only makes a few large concentrated trades will be more likely to lose money. Additionally, the trader who distributes funds over a number of different trades will diversify their risk, which will give them a better chance of profitable trading.
Making money in the forex market isn’t exactly impossible, but it’s pretty difficult. Experts recommend beginning trading using a practice account. You should also diversify risk by executing many small trades in different markets as opposed to one large trade. Using stop loss orders can also work to limit potential losses.
Final Thoughts on FX Trading
When it comes to trading currency, especially for people with limited funds, swing trading or day trading for a couple of days a week can be a great way to play the market. For people with larger fund pools, a carry trade can be a great alternative. In both cases, a trader must know how to time their trades because good timing is crucial to profitable trading. Essentially, like in any other market doing your homework will be crucial when it comes to making the right trades and learning how to profit from the market.
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