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Navigate fast-paced FX market: is forex trading profitable?

14:00, 2 June 2021

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Is forex trading profitable

The foreign exchange market (forex) is the largest international market in terms of liquidity, value and trading volume. According to a 2019 Triennial Survey by the Bank for International Settlements (BIS), FX trading reached $6.6trn a day in April 2019 - a 29% increase from $5.1trn in 2016. 

The BIS estimated the global forex market was worth $2.409quadrillion (around $2,409trn), significantly higher than their previous estimate of $1.924quadrillion in 2016.

The forex market consists of 170 different currencies available for trading 24 hours a day (except weekends). The US dollar (USD) accounts for 88% of all forex trades. 

Global forex market

Is forex trading profitable? There is no easy answer. Let’s consider what contributes to forex trading success. 

How to make money trading forex: three major factors to consider 

The largest forex market players are financial institutions, including hedge funds, multinational corporations, investment managers, as well as central, commercial and investment banks. Retail forex trading accounts for approximately 5.5% of the total international forex trading. 

So, how to profit from forex trading if you’re an individual trader? As a market, forex has its own inherent risks, with potential for both losses and profits. In order to increase your chances of making money when trading forex, you can mitigate risk by understanding the market and what drives it.

The three most important things to consider:

  • Risk management. There won’t be profits without losses. Consider implementing an effective risk management strategy.

  • Portfolio diversification. Remember that forex is not the only market you can trade. In a perfect world, forex shouldn’t exceed more than 20% of your investment portfolio. Holding other types of investments, including stocks, commodities, indices or cryptocurrencies, means diversifying your portfolio and reducing potential losses.

  • Trading strategy. Successful forex trading requires an effective trading strategy. There is no single perfect strategy that works every time for every market. One strategy might work well for a certain currency pair, but be unsuitable for another. Take time to define your trading goals and work out a trading strategy that fits.

Profitable forex trading depends on a high level of discipline. A well planned strategy will always help you avoid emotional trading and behavioral biases, and enable you to stay focused.

Profitable forex trading

Limit your risks and keep your emotions grounded

To profit from trading forex, usually you need to buy low and sell high. Although this principle appears simple, it’s not so easy in practice.

That’s why it’s vitally important to adhere to the basic, and the most important principles of forex trading and trading psychology.

  • Use a stop-loss religiously. No matter what. A stop-loss should be always set, regardless of any trading strategy you choose. By pre-defining the closing price of your trade, you protect yourself from a great deal of uncertainty and eliminate the risk of losing more money than you can afford. 

  • Keep your emotions grounded. The author of “The Intelligent Investor”, Benjamin Graham, once said, “the investor’s chief problem – even his worst enemy – is likely to be himself.” Some investors see trading as a game. Trying to beat the market, they often start losing at it. Trading has never been a game. It relies on discipline and analysis. Emotions cloud judgement. There is no sense in getting angry at the market, or worrying about your losing positions for too long. Tracking performance and adhering to your own trading rules are key ingredients for successful trading.

  • Keep up-to-date with the current forex market news. Follow forex market updates. Major announcements, news and events are key market drivers. Pay attention to events that can affect the market. Keep abreast of central bank interest rate updates, inflation rates, international trade numbers (trade surpluses and deficits) and political news. 

How to choose what and when to trade

Time to trade

Trading conditions can greatly vary during any given week. You should know the times when important news is announced. Also, market opening is considered a highly volatile and incredibly risky time.

Currency pair to trade

Which currency pair is the most profitable in forex? Seven major forex pairs make up 68% of the global FX market, according to Compare Forex Brokers. They are:

  1. US dollar vs Euro 24%

  2. US dollar vs Japanese yen 17.8%

  3. US dollar vs British pound 9.3%

  4. US dollar vs Australian dollar 5.2%

  5. US dollar vs Canadian dollar 4.3%

  6. US dollar vs Chinese yuan 3.8%

  7. US dollar vs Swiss franc 3.6%

66% of global forex trading falls into seven major currency pairs

The international forex market consists of major, minor and exotic currency pairs. You have a wide choice currency pairs to trade:

  • Major currency pairs are the most frequently traded couples. They usually provide the lowest spread and are the most liquid. They always have the US dollar on the base or quote side. The EUR/USD is the most-traded forex pair - almost 24% of daily FX volume. The major currency pairs are:

Pair

Countries

EUR/USD

Euro Zone/United States

USD/JPY

United States/Japan

GBP/USD

United Kingdom/United States

USD/CAD

United States/Canada

USD/CHF

United States/Switzerland

AUD/USD

Australia/United States

NZD/USD

New Zealand/United States

  • Minor currency pairs, or cross-currency pairs, do not include the USD and are often referred to as “crosses”. Currency crosses negates the need to convert the currency into US dollars. Today, brokers offer direct exchange rates. The most active crosses are derived from the 3 major currencies after the USD – the Euro, the British pound and the Japanese Yen. The minor currency pairs are the following:

Pair

Countries

EUR/GBP

Euro Zone/United Kingdom

EUR/CHF

Euro Zone/Switzerland

EUR/CAD

Euro Zone/Canada

EUR/AUD

Euro Zone/Australia

EUR/NZD

Euro Zone/New Zealand

EUR/JPY

Euro Zone/Japan

GBP/JPY

United Kingdom/Japan

CHF/JPY

Switzerland/Japan

CAD/JPY

Canada/Japan

AUD/JPY

Australia/Japan

NZD/JPY

New Zealand/Japan

GBP/CHF

United Kingdom/Switzerland

GBP/AUD

United Kingdom/Australia

GBP/CAD

United Kingdom/Canada

  • Exotic currency pairs consist of one of the major currencies paired with the currency of an emerging / strong smaller economy, such as Singapore, Hong Kong and countries outside the European Union. These pairs are traded less often than majors and minors due to a potential lack of liquidity. Examples of exotic currency pairs are:

Pair

Countries

EUR/TRY

Euro/Turkish Lira

USD/SEK

US Dollar/Swedish Krona

USD/NOK

US Dollar/Norwegian Krone

USD/DKK

US Dollar/Danish Krone

USD/ZAR

US Dollar/South African Rand

USD/HKD

US Dollar/Hong Kong Dollar

USD/SGD

US Dollar/Singapore Dollar

Trading volume

How profitable is forex trading? When calculating potential returns, trading volume is the #1 factor. The higher the trading size, the greater the profit or loss as the price moves. Forex trading is highly leveraged – the size of your trades can become much larger than your initial deposit. Some forex brokers provide up to 50:1 leverage (with even more in some countries). Trading more than you have could multiply your profits, but also increase your losses.

The majority of traders would agree that opening a series of modest trades, instead of a single large trade, is a safer strategy to increase trading volume. The “never put all your eggs in one basket” principle is common trading practice, which helps to diversify your portfolio and reduces risk.

Read more: Best recovery stocks for 2021: 3 companies to consider

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

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