Can a trader be profitable with Forex?
By Paul Choufani, Updated on: Apr 07 2023.
It is possible to be profitable while trading in forex. However, it requires operating with the right mindset as well as using a sound strategy based on trading rules predetermined by the trader. Applying this successfully and mastering key areas of trading is a big task, and requires work and practice in order to reach consistent levels of profitability in trading.
The key to trading in forex is consistency, in terms of practice and results. It is a practice which needs to be taken seriously by the trader. Too often, many traders either leave this industry after initial failures, while many others keep repeating the same errors which prevent them from advancing in this business. We also have the story of the trader who, for example, did brilliantly in one week or in a short time frame, leading him/her to apply the same actions, processes and tactics later on, resulting in the decimation of prior captured profits. Additionally, there are traders who do not identify their optimal strategy in trading to suit their character and lifestyle, which in turn results in suboptimal experiences in trading and in life.
Is profitability possible in forex trading?
There are many factors over different areas of interest which pose as limitations on attempts of traders becoming profitable. They include those of a technical nature and those revolving around individual and market behaviour.
It is important to consider that the market itself is a beast, designed to liquidate the highest amount of retail traders as possible, and this is not merely in the area of foreign exchange. Other asset classes also feature this phenomenon, as exchanges and hedge funds tend to drive the price in the direction of the most pain in the market, which is why fear and euphoria are such powerful indicators of prospective market movements. Banks and other large financial institutions have a bigger impact on the market than the retail sector due to their larger liquidity arsenals, as well as more data on fund flows and trade order parameters. Market manipulation is another unfortunate occurrence, which is why risk management practices need to be implemented both before and during open trades.
The key to success in trading in the foreign exchange market lies in mitigating the risk posed by as many factors as possible, and systemizing actions and winning strategies in order to iron out uncertainties and produce consistent results in the market.
Key factors while trading in forex
There are a number of factors to account for while trading in forex. They need to be addressed individually:
Trading platform selection and account operations
Traders should select a reputable exchange or brokerage platform on which to open a trading account. The platform needs to be technologically secure and robust, with no history of repetitive malfunctioning. The broker should be registered, and preferably regulated, within a certain jurisdiction. Unfortunately, there are numerous scams in the forex industry, and it is necessary to avoid them through selecting trading platforms known for their integrity in their operations.
After choosing the trading platform, the trader would do well to get used to the platform interface and its specifications, in order to familiarize himself/herself with the application, through creating a practice, or demo, account. Practicing his/her trading strategies on the platform of choice, prior to working with a real account, is recommended.
The trader would decide and iterate on the trading strategy(ies) used to achieve profitability consistently. Depending on the time frames and the duration of the trading session during the day, the trader would decide whether he/she would engage in position trading, swing trading, day trading, or scalping. Position trades are open for the longest time durations, while scalped trades are the shortest. The trader would also establish trading rules to follow, in terms of risk and behaviour, in order to systemize and habitualize the practice into guaranteed success.
Later on, a small amount of real money can be deposited on a new account, as the trader develops his/her abilities and gets used to trading more regularly. With success on a small scale achieved, larger amounts can be considered, all while the trader maintains proper practices and rules in his/her trading activity.
Simplifying the trading process is advisable, as too many indicators on an instrument chart would be confusing, and ultimately counterproductive. It is advisable that a trader maintains a trading journal as well, to keep records of trades and errors in trading, in order to learn and avoid similar future losses, therefore increasing long-term profitability. Consistency is important in forex trading, and it should be treated like a business, with initial learning periods represented by the trial and error phase, before results can be reaped later on.
Trading currency pairs
On the trading account itself, it is advisable to trade using the most liquid currency pairs, especially the major pairs which include the US dollar as the quote currency, such as EURUSD, GBPUSD and AUDUSD. Furthermore, trading specific pairs during periods when their respective volumes are high, is also advisable. For example, GBPJPY and AUDJPY tend to be more volatile during the Asian session, reflected by the Tokyo market opening hours. Additionally, GBPUSD is a favourable pair during the overlap of the New York and London market opening hours.
Expected and unexpected events
Anything can happen in the market, at any moment in time. The trader needs to always, always maintain adequate risk management practices when he/she has one or more open trades on the platform. The market shifts drastically due to both scheduled, as well as unexpected, events. Volatility is high normally during scheduled events, such as data releases or central bank statements, meaning that the potential for price volatility is even higher during events which are unexpected or unscheduled.
In January 2015, for example, when the Swiss National Bank depegged the Swiss Franc from the Euro, billions of dollars were lost among retail and institutional traders. It was an instantaneous event, and a trader avoiding heavy losses in forex trading would do so here via managing the risk in his/her open trades.
Leverage and risk-reward ratio
The use of proper leverage, as a central feature of trade management, is central in minimizing the risk involved in the trade, for the sake of protection of initial capital or previously captured profits. Excessive leverage poses a significant risk in this sense, despite the potential of rapid account growth.
Additionally, the risk-reward ratio is another important factor. Traders need to have the necessary psychological control over their actions after performing the study on a given forex pair. Closing a trade which is barely in profit, one which is probably going to continue in the desired direction, does not reflect proper emotional management. Allowing a trade run in deep into drawdown after the initial trade setup is invalidated, with the hope of a price reversal for the pair, does not represent proper emotional control either.
The best strategy for profitable forex trading
It is possible to become profitable in trading through mastering the four pillars of trading. Every single one of them is important and represents a crucial element in the strategy used by the trader. Even if one becomes proficient at three of the given factors and not the fourth, it is not enough as the missing skill would easily be the difference between a profitable account and an account in drawdown or significant loss.
Technical analysis represents the understanding of charts, analysing price action through candlework and psychological and technical levels, while accounting for indicators, both on the chart (such as moving averages) and below the chart (such as the Relative Strength Indicator, or Commodity Channel Index).
Fundamental analysis represents the understanding of the global market environment in the current period, which serves as the underlying context for market movements. The overarching economic and financial conditions here govern price action among different asset classes, including forex pairs. The trader needs to constantly be updated with current market conditions as well as political and economic developments around the world.
Risk management accounts for the amount of risk taken in the prospective trade itself, reflecting the amount the trader is willing and capable of losing in order to capture profits. This defines the stop loss. The trader would actively seek solid risk reward ratios, such as 1:2 or 1:3, in order to make the trade worthwhile. The implementation takes place through using stop losses in the trade, which enforces the risk management practice.
Emotional management is among the most important factors in the market, as a lack of prowess in this skill has the capability to ruin the good returns which result from mastering the other aforementioned skills. The most common gaffes made due to a lack of emotional management are overtrading and revenge trading activities, often using increased leverages, to increase profits and recover losses in a way which excludes the other 3 skillsets. It becomes akin to gambling, with trades placed out of pure emotion and impulse, often with destructive effects also due to the ego of the trader, with he/she not remaining calm after prior losses or gains. The trader needs to learn how to detach from emotions during trade management in order to not experience big losses or reduced gains in the market.
Forex leverage and trading psychology
There are classic cases where a trader slowly but surely, builds up his/her account over time, making incremental gains towards a significant amount, in relation to the initial capital. Then, on a day of high-stakes market volatility, the initial set of trading rules, which the trader had previously adopted, are broken by the trader himself, in a sheer act of risk and emotional mismanagement.
A highly-leveraged trade going the wrong way, on gold, for example, prior to a revenge trade resulting in further drawdown, could wipe out a large portion of previous gains captured over a longer period of time. The dopamine hits on the execution of such dangerous trades, in an internal chemical reaction parametrized by the age-old factors of fear, excitement and euphoria, emotions representing the classic, historical trading sentiments in the market, and whose effects often have devastating impacts on trading portfolios.
Trading is like the game of life, where a person analyses existing and prospective conditions, and implements his/her plan while managing risk and emotion. I would even go as far as to say that risk and emotional management exceed technical and fundamental analysis in importance. A great risk manager with relatively mediocre or even poor analysis skills will always trump the great analyst with poor risk and emotional management skills.
Technical and fundamental analysis represents the theoretical understanding of a chart representing a certain instrument’s price action, but risk and emotional management reflects the actual execution and implementation of the trade, as well as the management of gains and losses. Proper execution is important in trading as it separates the actual successful trader from the analyst. Analysts are often sought after by the media for their opinions and perspectives, but the art of trading itself involves important, real-life considerations, and those who have this successful practice in their arsenal are the best-positioned individuals to provide insight on the process and mentor future traders who seek to emulate their success. \
Frequently Asked Questions
Can you make a living off forex?
Not from a beginner's standpoint. The aim of a trader should be to learn the industry as a business and improve over time, growing from trading using a small fund towards managing large fund with bigger trades over time. In the future, consistent income from forex trading would be possible, and which would definitely help towards living expenses. However, it is not advisable to rely on trading as a form of income, especially in the early stages.
How long does it take to be profitable in forex?
It depends on the person. It could take 3-6 months for some, 6-12 months for others, and 2-3 years for other traders. It depends on whether the trader is a fast or slow learner, how much time and effort the trader can dedicate towards learning forex trading, as well as how fast he/she can learn from his/her mistakes in order to achieve consistent levels of profitability.
How can I avoid losing money in forex?
Combine fundamental and technical analysis with sound emotional and risk management practices. Maintain a journal in order to record your forex trading mistakes and learn from them. Start with a small fund using a reputable broker and develop your forex trading skillset. Decide on your trading strategy(ies) and do not break your trading rules.