Is Forex Trading Profitable? | CoinCodex

Forex trading can be profitable, but the chances you’ll succeed are very low. Most forex traders lose money. In order to make money with forex trading, you don’t only need to have a good trading strategy, but you also need to put a lot of care into position sizing. It’s also crucial to have extremely strong discipline in order to avoid making trades based on emotions.

What is forex?

Forex is a term used to describe the foreign exchange market. The fluctuations in the exchange rate between different currencies are a result of foreign exchange trading. The forex market is global, accessible to both institutional and retail investors, and is open for 24 hours a day, five days a week.

The size of the forex market is difficult to comprehend. According to the Bank of International Settlements, forex reading reached a daily trading volume of $7.5 trillion in April of 2022. 

The world’s largest banks are active in the forex market with advanced trading strategies and algorithms, as well as a lot of capital. It’s very difficult for the average retail trader to compete with these sophisticated trading operations, which have access to significantly more information and resources.

How to manage risk when trading forex?

If you are going to venture into forex trading, it is crucial to utilize stop losses, limit the amount of leverage you use, and choose a forex brokerage with a good reputation. However, even if you satisfy all of those conditions, you’ll still be a lot more likely to lose money than make money.

Use tight stop losses

Protecting your capital is crucial. Holding on to a losing trade in the hopes that it will eventually turn around is one of the most sure-fire ways of losing money. By using stop losses, you can essentially define the maximum you’re willing to lose on a specific trade in case the market moves against you. A stop loss can also be used to protect your profits in a trade that’s profitable. 

Choose a reputable forex broker

The forex industry is less tightly regulated than the stock market. It’s not too difficult to find forex brokers with questionable business practices, predatory fees, poor security and other major issues. It’s advisable to prioritize forex brokers that have  with regulatory licenses that have regulatory licenses and are authorized to offer their services in the country you reside in.

Be wary of excessive leverage

Forex markets usually display much lower price volatility than stocks or cryptocurrencies. Since price moves in the forex markets are so small, traders will often require leverage in order to amplify their trading results, and many brokers are happy to oblige. However, leverage is a double-edged sword and will amplify not just your profits, but your losses as well. 

In the forex industry, it’s common to find brokers supporting leverage of 100:1 or even higher. Some brokers even offer leverage of up to 500:1. For example, if you’re using 100:1 leverage, you can enter a position worth $100,000 by using just $1,000 in capital. The more leverage you use, the more risk you are taking on. 

Use demo trading

Demo trading (sometimes also called simulated trading) is a useful way of testing out new strategies without putting your capital at risk. Another benefit of demo trading is that it will allow you to get familiar with your broker’s trading interface and features without worrying about what happens if you make a mistake.

However, it’s important to keep in mind that demo trading will not improve your trading from a psychological aspect. Since there’s no real money at risk, your psychological reactions to winning or losing trades will be completely different than if you were trading with actual money. 

You’re much more likely to lose money than make a profit when trading forex

Most forex traders approach the market as day traders, making several trades withing a single day. Studies suggest that the vast majority of day traders lose money.

For example, a study from Brazil published in 2019 found that a whopping 97% of day traders who traded for at least 300 days lost money. Meanwhile, only 1.1% of the studied traders made a profit higher than the minimum wage in Brazil.

Meanwhile, a study from 2011 analyzed data from the Taiwan Stock Exchange between 1992 and 2006 and found that only around 20% of day traders were able to make a profit (net of fees) in a typical year. They also found that less than 1% of day traders were able to make a profit consistently. Another finding from the study is that over 75% of day traders quit within a period of two years.

So, you’re very unlikely to make a profit from day trading consistently over a long period of time. You might get lucky and make profits in the short term, but that’s perhaps more akin to gambling than something to pursue as a sustainable way of making an income.

The bottom line

The forex market is extremely competitive, which makes it difficult for the average trader to succeed. While it’s possible to make a profit with forex trading, the odds are definitely stacked against you.

For most people, buying stocks or ETFs and holding them for a longer period of time will be a much better choice than trying to make money by trading the forex market. If you’re interested to learn more about investing in stocks, check out our list of the best stocks to buy now.