Forex has always been viewed with suspicion by critics and aspiring traders, with the recent arrest of controversial YouTube influencer Andrew Tate drawing attention to another FX and trading scam.
However, it should be noted that forex trading itself is a completely legitimate practice, and one that’s no longer as pervasive as it once was thanks to the implementation of much tighter regulations. Unlike stock markets, forex markets are open 24/5, from Sunday evening to Friday night.
But just how viable is forex trading as a viable business venture, and what steps can you take to optimise your chances of success? Let’s find out!
What is Forex Trading?
In simple terms, forex trading is a global enterprise that allows participants to buy, sell and exchange international currencies.
The market comprises more than 170 different currencies, which are traded in pairs and as speculative asset classes. This means that you can trade the market without assuming ownership of the underlying financial instruments, leveraging the sector’s innate volatility and price movements, both positive and negative.
There are also three types of currency pairs; namely major, minor and exotic. Here’s a concise breakdown of each one:
- Major Currency Pairs: There are seven major currency pairs, each of which pit currencies from developed economies against the dominant US dollar (USD). These seven pairs comprise 85% of the markets’ daily trading volume, while the USD is on one side of 88% of all FX trades.
- Minor Currency Pairs: Minor currency pairs exclude the USD and pit other major pairs against one another, creating a wider range of assets to target. While they account for a relatively low share of total trades, they offer an optimal balance between liquidity and price volatility.
- Exotic Currencies: These pairs comprise one major currency (such as the USD or Euro) against one from an emerging economy, which may boast lower levels of liquidity and trading volumes. These pairs are considerably more volatile and can trigger more significant gains and losses in the process.
When trading forex, you should note that you’re dealing with a highly leveraged financial product. You can secure leverage through a margin account, which enables you to open positions that are disproportionately large to your deposit value (at a ratio that’s occasionally as high as 200:1).
We’ll touch more on leverage below, but this is significantly larger in the forex market than it is when trading stocks, commodities or alternative asset classes.
The Key Considerations When Trading Forex
With a broad understanding of forex trading, you can begin to build a comprehensive knowledge base and keen sense of determinism that enables you to recognise the underlying laws that govern change in the marketplace.
But what are the other key considerations before trading forex as a business enterprise, and what steps can you take to optimise your chances of success?
#1. Understanding and Minimising Risk
The criticism of forex is often built on misconceptions, with the promise of disproportionate returns and the speculative nature of FX often used to present it as a virtually risk-free endeavour.
However, these elements simply reflect the unique balance between risk and reward in the marketplace, and understanding them is crucial if you’re to achieve any kind of success as a trader.
This is also borne out further by the fact that approximately 70% of forex traders regularly lose money, largely through failures of understanding, preparedness and a fundamental lack of strategy.
But how do you cope with and manage risk? Well, we’d first recommend that you use a so-called “demo account”, which is offered by all online brokerages and allows you to access a simulated, real-time marketplace.
You can subsequently hone and test your strategies without risking your hard-earned cash, as you look to gain practical experience of forex trading and optimise your chances of success for a period of six months or so.
When trading for real money, it’s also important to make full use of the various risk management tools available through your chosen brokerage platform. There are several options in this respect, but stop loss and take profit orders are among the most popular and accessible.
Stop losses and take profit orders represent impositions on open trading positions.
In terms of the former, your position will be automatically closed once it has incurred a predetermined level of loss, minimising your market exposure and safeguarding your capital at all times.
Conversely, take profit orders automatically close positions once they’ve reached a predetermined profit margin, allowing you to bank a viable return while simultaneously managing your risk.
#2. Trading Requires the Right Mindset
There’s a fundamental difference between trading and investing, with the former synonymous with pursuing short-term gains and leveraging price volatility through speculative vehicles.
Conversely, investment remains synonymous with so-called “buy and hold” assets such as stocks, in the hope that they’ll appreciate incrementally over time and provide a consistently generative (and secure) store of wealth.
Both techniques require entirely different mindsets, as traders should deploy a much greater appetite for risk and an inherently strategic approach when it comes to executing orders.
Similarly, traders must be deterministic in their approach and understand that they cannot be on the right side of every single trade, thanks largely to the variable nature of market conditions and macroeconomic factors.
This makes it much easier to manage your starting capital and minimise risk, while preparing you for the inevitability of loss and encouraging the sensible use of leverage.
#3. Approach Leverage With Caution
As we’ve already touched on, leverage is one of the unique selling points that have helped to popularise forex trading (particularly among individual and retail traders).
Some licensed brokers even offer leverage of up to 200:1 on forex products, while such ratios are marketed as offering potentially huge returns on your starting capital.
However, it’s less commonly mentioned that this type of leverage can also trigger similarly large losses, which may cause you to incur debts that will be owed to your broker of choice.
This is a key consideration, and one that’s inherent to a market that’s already volatile and difficult to navigate as a novice. So, if you intend to make forex your business and achieve success in this marketplace, you should approach leverage with caution and utilise this in line with your risk appetite, capital holdings and broader trading strategy.
The key is to pursue reasonable profits without risking capital that you don’t have, especially as a new trader who has only recently started to trade with real money.
The Last Word – Is Forex Right for You?
As we can see, the forex market is inherently volatile and highly leveraged, while its speculative nature creates a unique meld of risks and advantages for traders to consider.
However, despite its volatile nature, the practice of forex trading is completely legitimate and above board, while it’s perfectly possible to make money with the right knowledge, strategy and willingness to use available risk management measures.
Ultimately, much depends on your starting capital and precise appetite for risk, as well as your ability to identify a trading strategy that can deliver sustainable results over time.
If you do decide to trade forex as a way of making money, we’d also recommend that you start small and scale your efforts organically before you make this your full-time source of income. Similarly, you should trade forex as part of a wider investment portfolio, and one that can minimise your exposure to risk over time.