It is often the case that the first experience many traders have of leveraged financial products is through foreign exchange, also known as FOREX or FX for short.
How to Make Money Trading Forex
Yet trading on FX is more complicated than trading on other financial instruments such as individual equities or stock indices. This is because currencies are always traded in pairs so one looks to profit through price fluctuations in one currency relative to another. When you trade a currency pair you not only need to know how much one point (or tick) is worth, but also which currency your profit or loss will be in. In addition it’s vitally important to understand what a currency quote is actually telling you as this will show you which way round you have to trade on a particular currency pair to back your view appropriately.
FX trading is done though a provider such as Spread Co. There are dozens of different currency pairs available ranging from the big liquid ones such as the Euro/US dollar and British pound/US dollar to more esoteric pairings as the New Zealand dollar/Canadian dollar.
So to begin with, let’s look at getting the trade the right way round. As noted earlier, in a currency pair you back how one currency will perform against another. So let’s consider a trade of the euro against sterling. You may expect sterling to rise and the euro to fall, but do you buy the currency pair or sell it? And what is the currency pair telling you? In trading convention it’s usual to see this pair expressed as what one euro is worth in terms of sterling. But we often hear this exchange rate expressed as what the pound is worth in euro terms. Here’s a table of some popular currency pairs and their abbreviations.
The table above shows a selection of currency pairs expressed according to market convention. The easiest way to understand FX pairs is to think in terms of the first-named, or “base”, currency. Staying with the EURGBP as an example, the EUR is the base currency while the GBP is the counter currency, and this is typically the form you will find the pair expressed in on trading platforms. If you expect the euro to rise against sterling then you “buy” the EURGBP currency pair. In contrast, if you expect sterling to go up (and the euro fall) then you would “sell” the EURGBP currency pair.
It takes time and application to work out how and why the underlying markets fluctuate. To make money you have to trade in the right direction and then choose your moment to book profits. At Spread Co offer demo accounts where you can try out the trading platform, work out different strategies and get the hang of everything before risking real money. The last thing you want to do is lose any of your hard-earned risk capital learning something new. Make sure you get the best out of your demo account: it is fine to dive in and out of different markets while you get the hang of the platform, but after that treat the demo as a real money account. In other words, consider the fundamentals and technical set-up before you place a “dummy” trade and take the time to learn how to use stops and limits.
Once you’re ready to move on to the real money account make sure you start small, and build your confidence slowly. The learning curve takes time and perseverance. But if you manage to follow some simple advice, you will quickly build a strong base from which to grow your account once the knowledge and experience kick in.
To begin with, it is worth focusing on just a couple of currency pairs rather than a large number. Also, concentrate on the most liquid currencies first, such as the EURUSD, GBPUSD and USDJPY. This is so you can build up your knowledge about how the major currencies react to news flow, economic data releases and technical trading levels. You also need to create a trading plan which will include strict money and risk management rules. It is this that is the key to maintaining a long and profitable trading career.
It’s important to remember that even the very best traders don’t win every time. So they make sure that when they do suffer a loss (or even a string of losses) they still have sufficient risk capital to carry on trading. They achieve this through disciplined money management. In its simplest form this means dividing up your trading capital into smaller parcels. Then you only risk a proportion of your funds on any one trade. How you divide up your risk capital is up to you. But it will depend to a large extent on the size of your trading fund. Some professionals say you should risk no more than 1% on any one trade. Others say it can be up to 5% or even 10%. Obviously, the lower the percentage, the more trades you’ll be able to place. However, if you only have a small amount of risk capital then there are likely to be many trades that you shouldn’t do once you factor in the minimum bet size and your stop loss.
This brings us on to risk management. Good risk management involves using stops and limits to help you plan and manage your trades. This provides structure and brings discipline to the whole process and takes some of the emotion out of trading. This is where charts come in. These are vital when it comes to establishing if a market is trending or ranging. Charts also help you identify areas of support and resistance which should be used as a basis for choosing stops and limits. If these terms are all new to you then it is worth putting in some study at this point. For instance, it is never a good idea to trade against the prevailing market trend. Likewise, if a market is stuck in a range it’s important to identify the tops and bottoms so you can avoid buying or selling at the wrong time. Drawing tools such as trend channels, Andrews’ Pitchfork and Fibonacci Retracements can help you identify if a market is trending or not and also identify significant areas of support and resistance.
As with any other speculation or investment, it is important to do your homework. Consider the fundamentals but study the charts as well. Never trade with money you can’t afford to lose, and don’t risk too much on a single trade.
Finally, it is often said that your mental capital is every bit as important as your financial capital. Having a trading plan and employing solid money and risk management techniques all help to take the emotion out of trading. This will help you maintain a disciplined approach to FX trading and so preserve your all-important metal capital as well.
Hopefully these rules can help you make money when you begin FX trading:
Practise on a demo account
Focus on a couple of major currency pairs
Create a trading plan
Be disciplined: don’t be tempted to move your stops further away from their original levels
Never add to a losing position
Never trade with money you can’t afford to lose
Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.