How to Make Money in Forex
What is Forex? Foreign Exchange popularly known as Forex or FX is a market for the buying and selling of different currencies and it is one of the fastest growing avenues to making money online. Transactions on the market are done through electronic means (internet and telephone) through an intermediary called the Forex broker. However, major trading ‘centers’ exists in London, New York, and Tokyo. Other trading ‘centers’ are: Singapore, Frankfurt, Geneva & Zurich, Paris and Hong Kong.
Forex market is made up of different players: individual trader, institutional traders, banks, other financial institutions (investment firms, pension funds and hedge funds etc), and governments through their Central Banks. An estimated $3.5trillion worth of transactions are being traded daily on the market and it is opened 24/6. Forex market is an unregulated market, making it accessible to everyone and easily exited by its players. This makes it impossible to know the total number of players in the market at a particular time.
The history of Forex trading could be traced to the abandonment of the Bretton Woods Agreement in 1971, and the US Dollar would no longer be convertible into gold. This led to currencies of major industrialised nation becoming more freely, controlled mainly by the forces of supply and demand, which acted in the Foreign Exchange Market. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970′s, giving rise to new financial instruments, market deregulation and trade liberalisation. In the 1980s, cross-borders capital movements accelerated with the advent of computers and technology, extending market continuum through Asian, European and American time zones. Turnover on foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $3.5 trillion a day in 2008.
The avenue to make money on Forex market was created since the Bretton Woods Agreement was abandoned in 1971, allowing for changes in prices of currencies as dictated by the forces of demand and supply. Making money in Forex is as simple as buying a currency and holding it for few minutes, hours, days, weeks or months depending on your kind of trading and selling it when it has appreciated in value or vice-versa. This simple act could fetch you more than 100% of your capital in few minutes! But as simple as it sounds, it requires adherence to a golden rule.
The Golden rule of trading Forex successfully is taking position in the right direction, at the right price, with the right stop loss and the right target. Following this golden rule must, however, be with precision. The precision can only be achieved by formulating a profitable equation in which risk is minimised to the bearest minimum. Whether or not money will be made in Forex is not the issue because the market is huge and highly liquid; the real issue is how to reduce the risk on your trade because the market is very volatile. You will succeed trading Forex only if you appreciate this fact and inculcate it in your trading style.
As far as I am concern, the real opportunity to make money in Forex trading lies in directional trading. Most often than not, the market moves in a particular direction. A trader must be able to detect and follow the markets direction or trend. This could be a short-term trend or a long-term trend. A careful study of the chart especially higher time-frame chart will reveal the trend. It should be noted that a trend on a lower time-frame chart could be a mere consolidation on a higher time-frame chart. So, it is advisable to study the market from an holistic point of view.
As much as making the trend your friend is important, so is entering and exiting the market. The secret of successful Forex trading is in entering the market at the optimal point. The optimal point or price is where the trader could trade with the bearest minimum risk while at the same time maximising possible profit. A good trader would not enter the market to make just some pips without considering the risk at stake. A good Forex trader will never play around with his/her capital. He would only trade when the risk level is very low and profit margin high. I would recommend a risk-reward ratio of at least 1:3.
However, it is equally important for a trader to know when the party is over and exit the market. A trader should have a definite target in mind when opening a trade and this should be set in the trading platform. Many a time, the market may not get to your target; a good trader must be able to read the charts to envisage this and close the position. I have seen many promising trade go bad at the end of the day. It is necessary for a traders to manage their trades by using trailing stop loss to protect some of the gains made. This will help you to rank in some pips if the market goes against your trade. This is why the use of trailing stop loss is inevitable.
Having the right psychology is paramount in currency trading. You must appreciate the fact that absolute no one can influence the market. So you must develop the right mind set that you have done your own part by applying your strategy and the golden rule and it is left for the market to play out. No matter how good your trading strategy is, you can never by right every time. There will some bad trades. As a matter of fact, expect it – that is why you cannot trade without stop loss. This will help you to control your emotion. The most important thing is to develop a working trading strategy and adopt sound money management. You will definitely make a success trading the foreign exchange market.
In summary, forex trading is all about taking position in the right direction, at the right price with the right stop loss and target coupled with a sound money management policy. If you can apply this principle, you would have joined the 5% of successful Forex trader.
