Forex for a trader
Does forex make money

Does forex make money3 Things I Wish I Knew When I Started Trading Forex. Your Forecast Is Headed to Your Inbox. But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk. Your demo is preloaded with ?10,000 virtual funds , which you can use to trade over 10,000 live global markets. We'll email you login details shortly. You are subscribed to Rob Pasche. You can manage you subscriptions by following the link in the footer of each email you will receive. An error occurred submitting your form. Please try again later. Trading forex - what I learned. Trading forex is not a shortcut to instant wealth. Excessive leverage can turn winning strategies into losing ones. Retail sentiment can act as a powerful trading filter.

Everyone comes to the forex market for a reason, ranging between solely for entertainment to becoming a professional trader. I started out aspiring to be a full-time, self-sufficient forex trader. I had been taught the 'perfect' strategy . I spent months testing it and backtests showed how I could make $25,000-$35,000 a year off of a $10,000 account. My plan was to trade forex for a living and let my account compound until I was so well off, I wouldn't have to work again in my life. I was dedicated and I committed myself to the plan 100%. Sparing you the details, my plan failed. It turns out that trading 300k lots on a $10,000 account is not very forgiving. I lost 20% of my account in three weeks. I didn't know what hit me. Something was wrong. Luckily, I stopped trading at that point and was fortunate enough to land a job with a forex broker. I spent the next couple of years working with traders around the world and continued to educate myself about the forex market.

It played a huge role in my development to be the trader I am today. Three years of profitable trading later, it's been my pleasure to join the team at DailyFX and help people become successful or more successful traders. The point of me telling this story is because I think many traders can relate to starting off in this market, not seeing the results that they expected and not understanding why. These are the three things I wish I knew when I started trading Forex. 1) Forex is not a get rick quick opportunity. Contrary to what you’ve read on many websites across the web, Forex trading is not going to take your $10,000 account and turn it into $1 million. The amount we can earn is determined more by the amount of money we are risking rather than how good our strategy is. The old saying “It takes money to make money” is an accurate one, Forex trading included. But that doesn’t mean it is not a worthwhile endeavor; after all, there are many successful Forex traders out there that trade for a living. The difference is that they have slowly developed over time and increased their account to a level that can create sustainable income. I hear about traders all the time targeting 50%, 60% or 100% profit per year, or even per month, but the risk they are taking on is going to be pretty similar to the profit they are targeting. In other words, in order to attempt to make 60% profit in a year, it's not unreasonable to see a loss of around 60% of your account in a given year. "But Rob, I am trading with an edge, so I am not risking as much as I could potentially earn" you might say. That's a true statement if you have a strategy with a trading edge. Your expected return should be positive , but without leverage, it is going to be a relatively tiny amount.

And during times of bad luck, we can still have losing streaks. When we throw leverage into the mix, that's how traders attempt to target those excessive gains. Which in turn is how traders can produce excessive losses. Leverage is beneficial up to point, but not when it can turn a winning strategy into a loser. 2) Leverage can be a winning strategy to lose money. This is a lesson I wish I had learned earlier. Excessive leverage can ruin an otherwise profitable strategy. Let's say I had a coin that when heads was hit, you would earn $2, but when tails was hit, you would lose $1. Would you flip that coin? My guess is absolutely you would flip that coin. You'd want to flip it over and over. When you have a 5050 chance between making $2 or losing $1, it's a no-brainer opportunity that you'd accept. Now let's say I have the same coin, but this time if heads is hit, you would triple your net worth; but when tails was hit, you would lose every possession you own. Would you flip that coin? My guess is you would not because one bad flip of the coin would ruin your life. Even though you have the exact same percentage advantage in this example as the example above, no one in their right mind would flip this coin. The second example is how many Forex traders view their trading account.

They go "all-in" on one or two trades and end up losing their entire account. Even if their trades had an edge like our coin flipping example, it only takes one or two unlucky trades to wipe them out completely. This is how leverage can cause a winning strategy to lose money. So how can we fix this? A good start is by using no more than 10x effective leverage . 3) Using sentiment as a guide can tilt the odds in your favor. The 3rd lesson I've learned should come as no surprise to those that follow my articles. .. using the Speculative Sentiment Index (SSI). I've written many articles about this topic. It's the best tool I've ever used and is still a part of almost every trading strategy I am using, present day. SSI is a free tool that tells us how many traders are long compared to how many traders are short each major currency pair. It's meant to be used as a contrarian index where we want to do the opposite of what everyone else is doing. Using it as a direction filter for my trades has turned my trading career completely around. Learn from my mistakes.

If I could tell my younger self three things before I began trading forex, this would be the list I would give. Utlimately though, if you are just starting out in the forex market, the best thing you can do is take time to learn as much as you can, starting with the basics. Read guides, keep up to date with the latest news and follow market analysts on social media. Forex Trading Tips FAQs. How much money can you make trading forex? Due to the availability of leverage, forex traders can make a return on a single trade that is multiples of the margin they used to open the trade. However, leverage is a double edged sword in that big gains can also mean big losses. Therefore, reliance on excessive leverage as a strategy typically leads to destruction of your account capital over the long run. This is because it only takes one adverse market move to drive the market far enough and trigger substantial losses. Your expectations on a return on investment is a critical element. When traders expect too much from their account, they rely on excessive leverage and that typically triggers a losing account over time. View forex like you would any other market and expect normal returns by using conservative amounts of no leverage. Since forex is a 24 hour market, the convenience of trading based on your availability makes it popular among day traders, swing traders, and part time traders.

Regardless of your style, use small (if any) amounts of leverage. If you were to expand the list to a fourth thing learned when starting to trade FX, what would it be? I touched on leverage above. We researched millions of live trades and compiled our results in a Traits of Successful Traders guide . In the guide we touch on risk to reward ratios and how it is important. With humans being human, we also touch on the psychological element that goes along with trading and why we may still make poor choices even if we know what is right. Sometimes our biggest obstacle is between our ears. Do you have any useful guides for new FX traders? We have compiled a comprehensive guide for traders new to FX trading . This guide includes topics like why traders like FX, how do you decide what to buy and sell, reading a quote, pip values, lot sizing and many more.

From my experience, learning how to decide what market to trade in FX is important. We also recommend the resource building confidence in trading which is found in the beginners tab of our trading guide resource section. You might be interested in. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. How to Make Money Trading Forex. In the forex market, you buy or sell currencies. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly. The object of forex trading is to exchange one currency for another in the expectation that the price will change. More specifically, that the currency you bought will increase in value compared to the one you sold. *EUR 10,000 x 1.18 = US $11,800 ** EUR 10,000 x 1.25 = US $12,500. An exchange rate is simply the ratio of one currency valued against another currency.

For example, the USDCHF exchange rate indicates how many U. S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U. S. dollar. How to Read a Forex Quote. Currencies are always quoted in pairs, such as GBPUSD or USDJPY. The reason they are quoted in pairs is because, in every foreign exchange transaction, you are simultaneously buying one currency and selling another . Here is an example of a foreign exchange rate for the British pound versus the U. S. dollar: The first listed currency to the left of the slash (“”) is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U. S. dollar). When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.51258 U. S. dollars when you sell 1 British pound. The base currency is the “basis” for the buy or the sell. If you buy EURUSD this simply means that you are buying the base currency and simultaneously selling the quote currency. In caveman talk, “buy EUR, sell USD.” You would buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency. You would sell the pair if you think the base currency will depreciate (lose value) relative to the quote currency. First, you should determine whether you want to buy or sell. If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price.

In trader’s talk, this is called “going long” or taking a “long position.” Just remember: long = buy. If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called “going short” or taking a “short position”. Just remember: short = sell. The Bid, Ask and Spread. All forex quotes are quoted with two prices: the bid and ask. For the most part, the bid is lower than the ask price. The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency. This means the bid is the best available price at which you (the trader) will sell to the market. The ask is the price at which your broker will sell the base currency in exchange for the quote currency. This means the ask price is the best available price at which you will buy from the market. Another word for ask is the offer price. The difference between the bid and the ask price is popularly known as the SPREAD . On the EURUSD quote above, the bid price is 1.34568 and the ask price is 1.34588.

Look at how this broker makes it so easy for you to trade away your money. If you want to sell EUR, you click “Sell” and you will sell euros at 1.34568. If you want to buy EUR, you click “Buy” and you will buy euros at 1.34588. Here’s an illustration that puts together everything we’ve covered in this lesson: What Is Forex and How to Make Money with It? Currency or Forex trading has received a lot of attentions in the past few years. However, let’s see whether it is what people really think, or it is something completely different. Forex is the knowledge and art of trading different currencies against each other and making profit through it. Each country has its own currency, and the currency of different countries can be bought and sold against each other. Forex traders are those who make money through buying and selling different currencies against each other. Forex is not a new business, and its history is as old as the history of money. However, computer and Internet have enabled people to trade Forex from home and through the personal computers. There are two kinds of Forex Traders. Forex trading is different from the money exchange business. A money exchange business also deals with the currencies. But it is different from Forex trading and Forex traders are not money exchangers.

Forex traders are those who buy and sell currencies against each other to make profit. They don’t to offer a money exchange service to people. 1) Retail Forex Traders: Retail Forex traders are the ones who trade Forex from home and through the retail brokers. They are the ones who lose a lot of money and give up on Forex trading sooner than later. Most people think that it is possible to have a fixed monthly income through Forex trading, and so they start doing it from home. However, Forex trading looks easy at the beginning and when you look at the price charts. Indeed, there is no retail Forex trader who can make money consistently from trading the currencies from home and through the retail brokers. It is becoming harder and harder to make money through Forex trading and as a retail Forex trader. Brokers get greedier all the time and try to cheat their clients more. Indeed, I have never seen a consistently profitable retail FX trader who trade currencies through the retail brokers. By the way, I forgot to tell you who Forex brokers are. They are the companies that connect you to the currency market to enable you to buy and sell currencies through your personal computer and the Internet. 2) Professional Forex Traders.

Professional Forex traders are the ones who either trade for the banks or the hedge funds and financial companies, or if they trade for their own, they do it through the bank accounts and with a reasonably big capital, not through the retail Forex brokers and with a small trading account. They don’t trade every day, because they only take the big trading opportunities to increase their wealth and capital. Indeed, currency trading is not a source of income for them. It is an investment opportunity to increase their wealth. Learn more about these Forex traders: So, the first thing you have to keep in mind is that Forex is not what the brokers and Forex signal websites advertise over the Internet. Therefore, make sure not to waste your time and money on it, with the hope of creating a source of income that makes money for you every month, consistently. It doesn’t work like that at all. Forex trading can’t be as your main source of income and full-time job. Period. If you don’t believe this, you will be back to this article and this website after a while of wasting time and money. So make sure to bookmark this page to come back here when you remember me and this article after losing some money and wasting a lot of time. I hope you don’t rick too much. How Can You Make Money with Forex?

Does what I explained above mean that you can never make any money through Forex and currency trading? No, I didn’t say that. Indeed, currency and stock markets are great investment opportunities. But please note that they are investment opportunities, not sources of income. It means, you can invest a portion of your capital in currency market to increase your capital, as you do the same with the real estate and stock markets. To do that, first you have to have a reasonable amount of capital that you can invest a portion of it in the currency market to increase your wealth and capital. This is how Forex trading and currency market can benefit you. Day Trading with Shorter Time-Frames. If someone tells you that he makes money every day while sitting at the computer and trading the currencies against each other through the shorter time-frames, then you should make sure to ignore him, because he is lying. Now, As I mentioned above, Forex is a good investment opportunity that enables you to invest some money and increase your wealth and capital. What if you don’t have any money to do this now? If you don’t have any money and capital to invest in the Forex market, then you have to create a reliable and strong source of income to make money consistently. Forex can’t be this source of income at all. I explained why. Therefore, if you are unemployed and you have no job and income, or you have a job, but your income is not enough and you want to make more money, and you think that Forex trading is the solution, you are wrong. I explained about the reasons above. What you have to do first, is creating a reliable and strong source of income. When you made enough money, you can invest a portion of it in the currency, stock and real estate markets to make more money and increase your capital. If you aren’t ready to do that now, then stay away from the Forex market, because you can’t make any money through it with a small $500, $1000 or even $10,000 account with a retail Forex broker.

This is the most important piece of advice we always give to our website’s followers. Now, if you are ready to start from the beginning and establish a reliable and strong source of income, I suggest you to read the below articles to understand what I mean by a reliable and strong source of income: The below article explains how our investments strategy works. If followed properly, it can make a lot of profit in long-term in the Forex market. This is the strategy you have to follow when you have already earned enough money through the reliable and strong source of income I talked about it above: A Short Term Investment Strategy That Makes You a Millionaire. Don’t Trust the Fund and Account Managers. There are some people who claim to be skillful and profitable Forex traders. They offer you to give them some money to trade in the currency market and return some profit or interest to you every month. These are the ones you should avoid as well. Many of them are scams.

The ones who are not scams, don’t know what Forex trading is in long-term. They have been lucky to make some profit for a short while. Therefore, now they think they are professional Forex traders who can double and triple the accounts every month. What will happen is that they will wipe out the whole account and all the money will be blown up. So, if you are looking for making money through Forex, make sure not to give your hard-earned money to anybody. Also you don’t risk your money to trade Forex on your own. For Newbie Forex Traders. For a newbie, Forex and currency market is nothing but a money sucker. It only wastes your time and money. That is it. Now, if you are really after making money and getting rich, you can follow a clear and straight-forward wealth building strategy: A Wealth Building Strategy to Create Wealth from Nothing. Forex market can make you richer only when you are already rich. Now you know what Forex is and how professional Forex traders make money.

Therefore, you won’t make any mistakes and you won’t lose any money in this market. You are lucky if you have found this article before risking any money in Forex trading. I know some people who haven’t been as lucky as you. They lost their shirts before they learn that Forex trading was not what they thought. Make sure you follow us on this site, if you are serious about getting rich without losing any money and wasting any time. In this below 23 minutes video, we have talked about the history of trading at the beginning. Then we have explained about the currency trading basics. This video covers the below topics: The currency market and the world of exchange The modern exchange The modern stock exchange The history of Stock Exchanges What is liquidity? Rating of quality The agreed minimum quantity which can be traded which is “LOT” in currency trading. Different kinds of exchange: Commodity, Stock, Currency International transactions: US Dollar, Euro, British Pound, Japanese Yen, Swiss Franc What is “Foreign Exchange”? Who works on the currency markets? Central banks of countries, Financial companies and brokerage houses, Private individuals like forex traders The markets working days and times Currency pairs Point or Pip Margin and Leverage Trading platforms Bid and Ask prices Spread Long and Short Positions Stop loss and target (take profit) orders. Here is the video: How Do You Make Money through Forex Trading?

You buy or sell a currency against another one when you come to this conclusion that their value is going to change against each other and consequently your trade will make profit for you. For example when you buy EUR against USD, it is because you think that the EUR’s value is going to go up against USD after a while. Therefore, (1) you pay USD to buy EUR and then (2) you hold the EUR you have bought for a while (3) to wait for the EUR’s value to go up against USD. Then (4) you sell the EUR you have bought to collect the profit you have made. For example, you buy €100,000 against USD when the EUR to USD rate is 1.0590. Therefore, you have to pay $105,900 to buy €100,000: 100,000 x 1.0590 = 105,900. You expect the EUR’s value to go up against USD and you are fortunate enough to see that it really goes up after a while and let’s say it reaches 1.0690. Therefore, you decide to sell the EUR you have bought to collect your profit. As the rate is now 1.0690, you will receive $106,900 when you sell the €100,000 you had bought: 100,000 x 1.0690 = 106,900. Therefore, you have made a $1,000 profit: 106,900 – 105,900 = 1,000. It can be the other way round if EUR’s value goes down instead of going up. For example, if it goes down and reaches 1.0490, and then you sell the EUR you have bought, you will lose $1,000 because you have paid $105,900 to buy €100,000 while the EUR to USD rate was 1.0590. Now it is depreciated to 1.0490, and so, you will receive $104,900 if you sell your €100,000: 100,000 x 1.0490 = 104,900. Therefore, you lose $1,000: 105,900 – 104,900 = 1,000. This is how you can make or lose money through Forex trading. How Can You Buy and Sell Currencies Against Each Other? 1) There are some brokers who facilitate the trades for you by providing a trading platform software that can be installed on your computer, and connecting the software to currency market. They charge you some fees for each of the trades you do. To make the work easier for, brokers pair the currencies against each other and create currency pairs. There are a lot of things you have to learn about the brokers before you open an account with them.

Many of them are not reliable and can make you lose money. So be careful. 2) You can trade the currencies against each other through a bank account as well. Now that I have almost explained what Forex is, I’d like to explain what Forex is not. Some people have some wrong impressions about Forex trading. Forex Is Not a Get-Rich-Quick Scheme. If you become a professional Forex trader who can make profit consistently, you can make a lot of money from Forex trading. But you can do that only when you become a consistently profitable trader who knows a lot of things about trading and knows how to manage and limit his risks. It takes time and effort to reach this level. You cannot start making money through Forex trading overnight and just by following a friend who is also a beginner and probably has been able to make some successful trades on a demo or a small live account. A Forex trader is called a consistently profitable Forex trader if he can make money consistently for several consecutive months and years. He should be able to repeat his success, not that he doubles his account through one successful trade and then keep losing money. No doubt that even a professional trader loses money sometimes, but the difference is (1) his losses are much smaller than his gains, and (2) he can easily recover his losses. Additionally, (3) the number of his successful trades is higher than the losing ones, and he can repeat this pattern over and over for several months and years. Keep in mind that trading can be risky and there are some people who have lost their shirt in trading.

Most or all of the professional Forex and stock traders, have at least one good source of income and use the trading to increase their wealth, not as their main source of income. Indeed, they force their money to make more money for them through the ways like stock or currency trading or other kinds of investments. Therefore, don’t look at Forex trading as a main source of income. You have to have a good backup. Hope I have been able to explain in brief what Forex is. Keep following us on this website if you like to become a professional trader who also has some good and stable sources of income and uses the trading as a way to increase his wealth. Most of those who ask “How Does Forex Work?”, don’t care about the technical aspect of Forex trading. They want to know whether it really makes money or not. People start learning how to trade Forex, because they want to make money. Many of them want to make a living through Forex trading and look for having a source of income through Forex trading. They want to become full time Forex traders who trade Forex to make a living. Some others look at Forex trading as an investment opportunity to increase their wealth. Now the question is whether Forex really works for these people or not. Before I answer this question, I’d like to explain a little about the technical aspect or Forex trading and how Forex works behind the scene. How Does Forex Work Technically? Forex or Foreign Currency Exchange is the business of exchanging the currencies against each other for the purpose of making profit.

This is what Forex traders do. They buy and sell the currencies against each other to make profit when one currency’s value goes up or down against the other one. Some others, offer a currency exchanging service to those who need to convert a currency to another. For example, tourists have to buy the destination country’s currency. The money exchange agency charges some fees to exchange the currencies to each other for them. You can do this through the banks too, but the private money exchange agencies are used to offer better prices: How to Run and Manage a Money Exchange Business that Makes Money. Forex trading is not something new. Its history is as old as the history of money. But the way that retail Forex traders trade currencies now, is somehow new. It is done electronically and through the Internet. It is almost 100% automatic and it needs no human touch to complete the exchanging process. To trade currencies against each other as a retail Forex trader, you have to open an account with a Forex broker. More professional traders, trade through the bank accounts that needs more capital. They buy and sell currencies against each other through a trading platform software, or through their online banking account. Here, I’d like to focus on this question that how does Forex work to make money for Forex traders. And, how Forex traders can make money with it and whether it is really possible to make money with Forex or not. How Does Forex Work to Make Money for Retail Traders?

Theoretically, retail Forex traders try to predict whether a currency’s value will go up or down against the other currencies. If they conclude that the value of currency A is going to go up against currency B, then they will buy currency A against currency B. It means they pay currency B to receive currency A. In case they are correct and the value of currency A really and reasonably goes up against currency B after a while, they will convert currency A to currency B. The price difference makes some profit for them. This is how Forex trading makes money for Forex traders theoretically. Now the question is whether this process results in profit in reality and actually or not. Can the Forex traders make money consistently? Is Forex trading a good and stable source of income? Does it really make money as a full time job? There is no doubt that the currency market is a big opportunity to make money. There are so many who make a lot of money through this market. However, to make money through currency trading, a retail trader has to have two things: He has to master a trading strategy. He has to have money to trade with and make more money (profit). Mastering a Trading Strategy. There is no special and clear way to master a trading strategy. While it is hard and complicated for most people, some others can do it after a while of learning and practicing. I personally believe that mastering a trading strategy and then making money as a professional trader has four stages: You have to choose a trading strategy and learn the related basics and technical parts.

You have to demo trade the trading strategy until you become a consistently profitable demo trader who makes profit on the demo account consistently and consecutively. To make sure that you have reached this level, you have to repeat your success for 6 consecutive months at least. After becoming a consistently profitable demo trader, you have to try the same trading strategy on a small live account to make sure that you can repeat your success with real money too. To make sure that you have gained such an ability, you have to repeat your success at least for 6 consecutive months here too. You can trade with a bigger account to make a reasonable amount of profit. If you can afford, you can even trade through a bank account that needs more capital, because banks usually don’t offer any leverage. Nobody knows how long it takes to pass the first 3 stages and reach the stage 4. It is different from person to person. However, something which is clear is that nobody can pass these stages without spending enough time and energy. You have to spend time to become a consistently profitable demo and then live trader. You have to practice with peace of mind. Now, it is time to refer to the beginning of this article that says “People start learning how to trade Forex, because they want to make money…” Whether you like to make a living through Forex trading or you want to look at it as an investment opportunity to increase your wealth, you have to be financially free while you are trying the master your trading strategy and pass the 4 stages I outlined above. Financial freedom creates the peace of mind you need to spend enough time on learning and practicing. When you are not financially free and you have to make money as soon as possible, you will not have the peace of mind you need to focus on learning and practicing, and you push yourself to start making money as soon as possible. Therefore, you will open a live account even before you become a consistently profitable demo trader.

Then you will push yourself to make money with your live account. But, as you haven’t completed the learning stages yet, you will make a lot of mistakes, and so, you will lose money. Most traders wipe out their live accounts at least a few times. Unfortunately, many of them start trading with the money they cannot afford to lose. Finally, they give up after wasting a lot of time and money. You can’t make money through trading, when you HAVE TO make money. This is one of the big differences that trading has with the other money making opportunities: Trading Strategies Don’t Work If You Don’t Choose the Right Living Strategy. How Does Forex Work Practically? Therefore, we can say that making money through Forex trading has two main stages: Mastering a trading strategy Having enough money to trade and invest. According to what I explained above, both of these stages are dependent on “money”. You have to have money to master your trading strategy. Then, you have to have enough money to open a reasonable live account. You can start with a small account, but it takes you a lot of time to turn it into a reasonably big and professional account. Therefore, having a good and strong source of income is a must. This is how Forex works.

It is not only with Forex. It is the same with any trading and investment opportunity, be it currencies, stocks, real estate and… Forex Trading as a Full Time Job to Make a Living With. Forex or stock trading can’t be known as full time jobs that you can make a living with. They are good and strong investment and money making opportunities, but you shouldn’t look at them as full time jobs. The first and the most important reason is that making money through trading is not just dependent on you, your abilities and activities as the trader. It depends on the markets too. Sometimes the markets become too slow for several months, and so, you can’t locate a trade setup to make money. Sometimes the markets become too volatile and cause some big losses. You need to have a good and strong source of income and a reliable backup to support your trading venture, otherwise you will be in trouble. While Forex trading is a great opportunity to make a fortune, it is not a business that you can make a living with in long term. It is the same with stock trading and real estate investment. They can help you increase your wealth and grow your capital dramatically. But it is too hard to rely on them as the main sources of income under the normal conditions. It is great that you are after making money through Forex trading.

But you should consider the facts I explained above to avoid wasting any time and money. As I explained above, having a good and strong source of income is a must for those who want to learn to make money through Forex trading, and also for those who have already mastered their trading strategies. That is why we not only teach our followers the trading techniques, but also help them to establish a good and strong source of income. This is how Forex works. Just before you go, did you check This System? Make sure to do it now, otherwise you will regret. Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake. by David Rodriguez , Quantitative Strategist. Big data analysis, algorithmic trading, and retail trader sentiment. Your Forecast Is Headed to Your Inbox.

But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk. Your demo is preloaded with ?10,000 virtual funds , which you can use to trade over 10,000 live global markets. We'll email you login details shortly. You are subscribed to David Rodriguez. You can manage you subscriptions by following the link in the footer of each email you will receive. An error occurred submitting your form. Please try again later. We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Here is what we believe to be the number one mistake FX traders make. W hy do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article , we look at the biggest mistake that forex traders make, and a way to trade appropriately . Why Does the Average Forex Trader Lose Money?

The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain. Percent of All Trades Closed Out at a Gain and Loss per Currency Pair. Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 312014 to 3312015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average ProfitLoss per Winning and Losing Trades per Currency Pair.

Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 312014 to 3312015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades . Let’s use EURUSD as an example. We see that EURUSD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBPUSD pair was even worse. Traders captured profits on 59% of all GBPUSD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain.

Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out . Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run . It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing. What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?

50% chance to Win 1000. 50% chance to Win 0. Expect to win $500 over time. Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again. 50% chance to Lose 1000. 50% chance to Lose 0. Expect to lose $500 over time. In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory. Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains . It feels “good enough” to make $450 versus $500 , but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around.

This doesn’t make any sense from a trading perspective—50 0 dollars lost are equivalent to 50 0 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure. Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall. Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “ rewardrisk ratio ”.

If you risk losing the same number of pips as you hope to gain, then your rewardrisk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 rewardrisk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades. What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio . That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower rewardrisk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher rewardrisk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the rewardrisk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits. Once you have a trading plan that uses a proper rewardrisk ratio, the next challenge is to stick to the plan.

Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning . This will allow you to use the proper rewardrisk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management” . Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period.

Those under 1:1? A mere 17 percent. T raders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 312014 to 3312015. Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a riskreward ratio of 1:1 or higher. Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same rewardrisk ratio to any trade.

If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 312014 to 3312015. View the next articles in the Traits of Successful Series: The Traits of Successful Traders. This article is a part of our Traits of Successful Traders series. Over the past several months, The DailyFX Research team has been closely studying the trading trends of traders via a major FX broker. We have gone through an enormous number of statistics and anonymized trading records in order to answer one question: “What separates successful traders from unsuccessful traders?”. We have been using this unique resource to distill some of the “best practices” that successful traders follow, such as the best time of day, appropriate use of leverage, the best currency pairs, and more. Stay tuned for the next article in the Traits of Successful Traders Series. Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.

com. Sign up to David’s e-mail distribution list to receive future e-mail updates on the Traits of Successful Traders series and other reports. Contact and follow David via Twitter: twitter. comDRodriguezFX. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. How Forex Brokers Make Money. In the foreign exchange market, traders and speculators buy and sell various currencies based on whether they think the currency will appreciate or lose value. The foreign exchange, or forex market is high risk and sees more than $5 trillion dollars traded daily. Traders have to go through an intermediary such as a forex broker to execute trades. No matter the gains or losses sustained by individual traders, forex brokers make money on commissions and fees, some of them hidden. Understanding how forex brokers make money can help you in choosing the right broker. (For related reading see : 5 Tips For Selecting a Forex Broker .

) Role of the Foreign Exchange Broker. A foreign-exchange broker takes orders to buy or sell currencies and executes them. Forex brokers typically operate on the over-the-counter, or OTC, market. This is a market that is not subject to the same regulations as other financial exchanges, and the forex broker may not be subject to many of the rules that govern securities transactions. There is also no centralized clearing mechanism in this market which means you will have to be careful that your counterparty does not default. Make sure that you investigate the counterparty and his capitalization before you proceed. Be vigilant in choosing a reliable forex broker. (For related reading, see: Market Makers Vs. Electronic Communications Networks.) In return for executing buy or sell orders, the forex broker will charge a commission per trade or a spread. That is how forex brokers make their money.

A spread is a difference between the bid price and the ask price for the trade. The bid price is the price you will receive for selling a currency, while the ask price is the price you will have to pay for buying a currency. The difference between the bid and ask price is the broker’s spread. A broker could also charge both a commission and a spread on a trade. Some brokers may claim to offer commission-free trades. Actually, these brokers probably make a commission by widening the spread on trades. The spread could also be either fixed or variable. In the case of a variable spread, the spread will vary depending on how the market moves. A major market event, such as a change in interest rates, could cause the spread to change.

This could either be favorable or unfavorable to you. If the market gets volatile, you could end up paying much more than you expected. Another aspect to note is that a forex broker could have a different spread for buying a currency and for selling the same currency. Thus you have to pay close attention to pricing. In general, the brokers who are well capitalized and work with a number of large foreign exchange dealers to get competitive quotes typically offer competitive pricing. Risks of Foreign Exchange Trading. It is possible to trade on margin by depositing a small amount as a margin requirement. This introduces a lot of risk in the foreign exchange market for both the trader and the broker. For example, in January 2015, the Swiss National Bank stopped supporting the euro peg, causing the Swiss franc to appreciate considerably versus the euro. (For related reading, see: Why Switzerland Scrapped the Euro .) Traders caught on the wrong side of this trade lost their money and were not able to make good on the margin requirements, resulting in some brokers suffering catastrophic losses and even going into bankruptcy. Inexperienced traders could also get caught up in a fat finger error, such as the one that was blamed for the 6% dip of the British pound in 2016. Those contemplating trading in the forex market will have to proceed cautiously—many foreign-exchange traders have lost money as a result of fraudulent get-rich schemes that promise great returns in this thinly regulated market.

The forex market is not one in which prices are transparent and each broker has his own quoting method. It is up to those who are transacting in this market to investigate their broker pricing to ensure that they are getting a good deal.



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