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Can you make a living from forex trading? While the answer to this question is definitely in the affirmative, trading forex profitably does not come easy. Like most desirable professions, it takes training, focus and commitment to achieve long-term success as a forex trader.
Traders who have been consistently making money on forex trading and derive most of their income from that activity also tend to have a particular psychology and mindset that conditions them for and facilitates their success. This and several other factors could determine whether you can profitably trade forex for a living or not.
In this article, Benzinga explains whether your personality and temperament might fit a trader profile and if you have what it takes to profit from forex trading and become a professional operator in the forex market.
Becoming a Professional Forex Trader
If you’ve ever attempted to master a musical instrument, then you know the amount of time, commitment and practice involved in achieving any level of proficiency. Trading professionally in the financial markets is similar in the amount of time and commitment needed to become a master of the skill.
At a minimum, you will need to develop a consistently profitable forex trading strategy as part of an overall trading plan. You will then need the skill and discipline to apply that strategy and manage your positions with real money on the line in a variety of market conditions.
For most people, forex trading for a living doesn’t sound like a viable career option for one reason or another. Despite all the potential pitfalls, a considerable number of people have taken advantage of the work-at-home opportunity presented by the relatively recent advent of online forex trading to become professional forex traders.
To become a professional forex trader, certain criteria need to be met that include having access to risk capital and a compatible trader personality profile. While some personality types are well suited for forex trading and tend to become profitable as a result, people with other personality types are probably better off letting others trade their money for them.
Much like becoming proficient in a musical instrument, trading forex profitably also generally requires considerable practice. Fortunately for prospective traders, many of the best online forex brokers offer free demo accounts. These accounts allow you to practice trading in a real-time forex market account without risking your money.
Several of the popular trading platforms supported by online forex brokers allow you to test and backtest your trading strategies. You can even design and code algorithms to fully automate your forex trading with sophisticated trading software like the MetaTrader 4 and 5 (MT4/5) platforms developed by MetaQuotes.
How to Know if Trading Forex for a Living is Right for You
Several factors can determine if trading forex for a living is right for you. First of all, you will need to devote the necessary time required to learn about the intricacies of the forex market and what trading it successfully typically involves.
If you have the time and inclination to devote to that process, then forex trading might be a good fit for you. Other elements that could indicate forex trading might be suited to your personality are listed below:
You Know and Understand Forex Trading Strategies and Styles
If you’ve determined that you have the time, discipline and willingness to gain an understanding of the forex market, you can expand your knowledge by learning about different trading styles and techniques.
A key factor to determine is your “threshold of pain.” This means knowing the level of risk and financial loss it takes to make you feel uncomfortable so that you can determine the amount of money you’re willing to put at risk. You will also need to find out how you deal with making profits and taking losses to determine whether you’d be comfortable as a professional forex trader.
The type of strategy you choose can also make a big difference to the levels of financial risk you’d be exposed to as a forex trader. For example, the longer the time period a trading position is held, the more overall market risk the position is typically subject to.
Furthermore, studying what types of strategies and trading styles tend to work best in the moderately volatile forex market would be a good place to start to determine what might also work for you as a forex trader. For example, some traders who prefer to avoid taking overnight positions opt to use short-term strategies like day trading or scalping to limit their risk somewhat.
In contrast, trend traders typically establish longer-term positions to capture and profit from bigger directional exchange rate moves, while swing or momentum traders look to profit from both trending and counter-trend corrections and might run positions over several days. Using these longer-term strategies does expose a trader to the added risk of running positions overnight when they cannot be monitored.
Currency hedge funds and a few high-net-worth traders also establish long-term forex positions. These long-term positions can take several weeks or months to complete the exchange rate moves the trader anticipates.
While such strategies can be profitable, they also typically require deep pockets to operate them because of the potential for substantial swings in the forex market that can stop the poorly-funded trader out at a loss.
After you’ve determined your risk profile and selected a suitable trading strategy, you’re ready to test and practice using your strategy in a forex demo account. The following suggestions might help you along the path to making a living trading forex.
You Have a Trading Routine
Practicing forex trading occasionally will probably not give you the needed experience to begin trading professionally. Many professional traders have spent years honing their skills to the point where they can exclusively trade forex for a living.
You would probably improve your chances of success by developing a trading routine once you’ve selected a strategy. You can start by setting aside some time each trading day to exclusively watch and trade the forex market. You can initially do this in a demo account before graduating to trading in a funded account as you gain confidence in your trading abilities and strategy.
Getting acclimated to routinely trading in a demo account several hours a day prepares prospective traders for forex market volatility and gives you a general feel for the market and how it moves. Establishing a daily trading routine can help provide you with the insight of a professional and is invaluable if you’re serious about trading forex for a living.
While forex trading has more in common with professional gambling than investing, you would be sensible to approach forex trading as a business. This means you should develop a trading plan with a strategy you can adhere to.
Such a plan should also incorporate well-defined risk parameters and sound money management principles that include appropriate position sizing guidelines. You will probably also want to put protective stop-loss orders in the market whenever you will not be watching a position personally to limit your overall financial risk.
You are Willing to Put Time and Energy into Trading
Regardless of your experience trading in other financial markets, forex trading is a completely different animal. The forex market monetarily expresses the condition of the economies of entire nations, and geopolitical events and natural disasters are just a few of the many elements that contribute to the relative valuations of currencies.
Although the decentralized forex market trades continuously from Sunday afternoon until Friday afternoon New York time, it operates in several different trading sessions as it does so. This feature can result in significantly more trading opportunities in certain currency pairs during one or more of the trading sessions.
For example, liquidity and transaction volume in U.K. pounds sterling vs. U.S. dollars or GBP/USD currency pair typically increases during the London trading session. The release of important U.K. economic data during the London session can also drive an increase in volatility during that session that can boost trading profits.
To become a professional forex trader, you’ll have to commit to putting in the time and energy necessary to make sound trading decisions. Many successful traders use technical and fundamental analysis to determine and trade market trends and corrections profitably.
Since currencies trade relative to each other in pairs, the forex market’s evaluation of the economies of the two nations contributes to the exchange rate of every currency pair. This is the reason most successful forex traders keep a keen eye on economic data releases, elections and central bank rate decisions.
Many successful traders employing short-term strategies use technical analysis to generate objective buy and sell trading signals. Other traders might establish positions in certain currency pairs based on their expectations for the result of national elections or other geopolitical events that might alter the market’s perceptions of a currency’s relative value.
Most professional forex traders have put in a considerable amount of time and effort to educate themselves on the forex market. While a direct shortcut to gaining knowledge and experience in forex may not be readily available, social trading could be another way of gaining knowledge and experience by watching another trader’s transactions be duplicated in your own account.
You Can Adapt and Adjust Your Trading Strategy
Many traders find that their strategy may work for a certain period of time, but that its profitability tends to decline over time or if market conditions change significantly.
This phenomenon may arise from a number of factors that can include other traders employing similar strategies or the market evolving in a way that invalidates previously-reliable trading signals.
Successful traders tend to be flexible, so they will typically adapt their strategies to new market conditions rather than keep them static. To become a successful trader, you’ll need to get to know when your strategy begins to fail and adjust it as necessary.
You Understand Money Management
Money management is one of the most important elements of profitable trading. An old market adage states, “In trading, it's not how much money you make that makes you successful, it’s how much money you don’t lose that makes you a profitable trader.”
This saying encapsulates the importance of money management to trading forex successfully. Prudent money management can significantly reduce your risk and protect the capital you have deposited as margin in your trading account.
For example, a common money management technique consists of apportioning a certain percentage of the value of the account for each forex position. The risk of losing the entire account balance because of a large position going against you is significantly reduced by exposing only a small percentage of the account to market risk at any time, while trades also increase in size as profits accumulate.
Professional blackjack players are well aware that a string of losses could wipe them out, so they only risk a small percentage of their capital on any single bet. They also typically increase their bets once they perceive an advantage over the house in their card count. The gambler thus stays in business despite a string of losses.
Another important money management technique consists of the trailing stop. This method involves placing a stop-loss order on an existing position and then scaling that order up on long positions or down on short positions as profits increase.
Overall, having a good grasp on money management and having an objective way to determine the amount of risk you take with each position can make a big difference to your trading account balance over the long run.
You Understand Experienced Traders Lose Money
Trading forex has a lot in common with gambling, so it involves the significant risk of losing money. Many successful traders take more losses than profits because they limit their losses prudently and let their profits run.
Knowing when your judgment has erred and subsequently taking a loss when trading is one of the key elements to successful trading. Also, incorporating prudent money management techniques into your trading plan can significantly reduce your losses.
If you plan on trading forex for a living, know that taking losses will be part and parcel of the trading process, so you will need to become comfortable doing that. Keep firmly in mind that taking many small losses can be easily offset by just one decently profitable trade.
One helpful way to think about taking a small loss is that you are reacting prudently and conservatively to the distinct and undesirable possibility of having to take an even larger loss in the future. By taking that small loss now you will also have conserved more trading capital to take a winning trade when the opportunity arises later on.
Do You Have What it Takes to Trade Forex For a Living?
Trading forex is different from investing in the stock or bond markets since you can lose your entire trading capital. Trading forex entails taking considerably more risk than investing in stocks or other financial assets where you might be looking for long-term capital growth while conserving your invested money.
Whether you have what it takes to trade forex professionally also depends on your personality type and your aversion to risk. In addition to risk capital, you will also need enough spare time to acquire the skills you will need to trade forex for a living and practice using them.
While the mechanics of trading forex are relatively simple, doing so profitably is not easy for everyone, so most retail forex traders lose money. If you do plan on trading forex as a sole means of income, then you’ll want to take the time to develop a consistently profitable strategy to incorporate into an overall trading plan. You will need the patience to form that plan and the discipline to stick to it.
Those who would like to get involved in the forex market but only have a limited time that they can dedicate to the endeavor can consider popular alternatives like social trading. Social trading networks let you copy the transactions of other forex traders with established track records in your own account so that you can participate in forex trading without having your own trading strategy or staying glued to your screen.
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