What to Know Before Starting Forex Trading

The FX Market is Not a Get Rich Quick Scheme

You may have seen a bunch of Internet articles showing you how to get rich quick in the FX market. That is simply not the case. The profit to be made can be more about the money you risk instead of having a good trading strategy. There is a saying that states, “it takes money to make money” and that rings true for the FX market for sure. However, that being said the market is a legit market where many traders made significant money. The thing is successful traders have put in their time and their account has risen to the point where they can make a good income.

Often you will hear that FX traders target 50% to !0% profit annually or even monthly. Still, the risk taken is much the same to the profit targeted. To rephrase it., to look to make a profit of 60% annually it is not out of the realm of possibility to see a yearly loss of 60% either.

You may trade in the FX market with an edge so you may not risk as much as you could make. That may be the case if you have a legit trading strategy. The expected return should, obviously, be on the positive side but if you do not use leverage, the profit will not be a significant one. When you have a cold streak in trading you can still use leverage in the market to target positive gains. Conversely, this is also how FX traders can incur large losses. You can use leverage to a certain extent but not the point where a solid trading strategy morphs from a winning one to a losing one.

Leverage Can Be Strategy that Wins But Fails to Make Profit

If you leverage to much in FX trading it can hurt a good overall trade strategy. If you flip a coin and you choose heads you win $2 but if it lands on tails, you could lose a buck. If that is the scenario, would you flip the coin knowing that? Sure. When you have an even chance to make money you would continue to flip the coin. If you use the same coin where if you pick heads your net worth is multiplied by 3x but if tails come up you lose it all. Again, would you take the chance on that coin flip? With the risk involved that is not likely. One wrong choice of the flip could send you on the path to financial ruin even though the chances are the same for heads and tails. In this example, not many would choose to flip the coin in the latter scenario.

Another example is the way that FX traders see their account. They may bet the farm, i.e. bet it all, on one or two trades and they could lose all the capital in their trading account. Even if it was the case they had a trade edge, like the example of the coin flips above, a trade or two with bad luck could leave them wiped out. Because of this leverage in the FX market a strategy that is a good one can still not be profitable. One way to fix this is using a less than 10x effective leverage strategy.

Your Opinions Can Help You Out

One of the better tools to use when FX trading is the IG client sentiment tool (IGCS). It should be a part of your trading strategy. It is a free tool to use that shows how many FX traders are long as opposed to ones that are short when it comes to currency pairs. It is a type of contrary index pulling you in a direction to go against the grain, meaning doing the opposite thing others are doing in the market. You can use the IGCS to help guide trades that can turn into ones that make you a profit.

Is FX Trading Profitable?

Considering leverage traders in the FX market can make a solid profit on just one trade that multiplies the margin that opened that trade. Still, with leverage while the profits can be big so can the losses. Because of this, putting too much credence into leverage as a trading strategy can, oftentimes, lead to the draining of your trading account in the long haul. The reason is that only one fluctuation in the market to move it significantly can bring about a big loss.

It is key that the return expectation you have for your investment. Traders that are under the expectation of big gains can lean too much on too much leverage and that can bring about losses. You should look at forex like other markets in that you can have typical returns on investments with the use of funds of a conservative amount without any leverage.

With the FX market open 24/7 it is easy to trade anytime making the market an attractive one for day traders, swing traders, and traders in it only part time. No matter what your FX trading style is you should use smaller leverage amounts if any at all.