How to Make a Profit from Forex Trading

The general idea behind Forex trading, or trading the foreign exchange market, is to correctly identify the direction a currency pair is going to move, and to buy or sell it. If the trader is right, a profit is made; and if not, the trading account takes a loss. The more profits are made, the better the performance of the trading account is. Conversely, losing trades will result in the trading account being depleted. Reading a trading account is not that simple, and looking at the details in a trading report requires a bit of knowledge about Forex. For example, one may have 10 losing trades in a row and only one winner, and still make money. It all depends on the money management system, the risk/reward ratios, and the volume being traded. There are therefore many things to consider when trading the Forex market, and, on top of the ones mentioned so far, the time horizon and the trading style matter as well.

Ways for the Account to Grow

Money management is key to planning any financial goal, and it cannot be truer than in the case of Forex trading. Not only do traders need to know everything about the technical and fundamental factors that influence the market, but they need to plan their steps carefully. Perhaps the main reason why most of the newcomers in the Forex market fail is a wrong understanding of how this market functions, and psychological factors that are prone to making people take wrong decisions. After all, opening and closing any trade is subject to a decision-making process.

Real Profit of Loss

To make any real progress at the beginning, trading should be viewed as a regular business. Taking a trading position in the Forex market has some associated costs and benefits. Costs are always deducted first, and benefits afterwards. Moreover, costs are fixed, while benefits are potential.

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The chart below shows the earlier EUR/USD trade taken as explained in the previous article here on the Trading Academy. Again, keep in mind that this is a demo account and not a live one.
The short trade taken earlier is now showing a loss. If you look on the bottom right corner, a loss of -81.50 USD is shown. However, that is not the total cost associated with this position. To this we must add the commission fee that was already deducted from the trading account, in this case -3.50 USD. Having said that, the account is down -84 USD so far. As you can see, the opening price of the short trade was 1.07458, and, if the stop loss is hit, the position will be squared at 1.0800. To close a short position, or to square it, a long trade should be issued. The difference between the selling price (bid price) and the closing price (ask price) represents the profit or loss of a trade, expressed in pips. However, if you check the bid and ask prices of any given currency pair, you’ll notice that they are not the same. This difference is called a spread, and it must be paid as well. Following up on the EUR/USD short trade, the total cost of the trade is 84 dollars plus the spread. In the case of the EUR/USD, the spread is one of the smallest, if not the smallest, in the industry, but it still represents a cost. If the trade does not reach either the stop loss or the take profit today, it will still be open when the overnight rollover happens. This would result in a positive or negative swap being added or deducted to the trading account, making the total cost of the trade change again. While so far this trade has shown a loss, that is not really the case until either the stop loss or take profit is hit. Up to this point, the move against the position is called a “drawdown”, and, as a rule of thumb, the smaller the drawdown is, the better the performance. In the meantime, as you can see below, that loss disappeared completely, as it turned out that the market made a fake move. That spike, therefore, was only a drawdown.
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Money Management and Trading Style

Money management plays an important role in Forex trading, as mentioned earlier in this article. Before we explain it a bit more, keep in mind that it is not possible to trade the Forex market without suffering losses. The idea is for the account to grow, and so for more profits than losses to be realised. It is not possible to have only winning trades, just as it is not possible to have only losing ones! What is possible is to have a good winning streak, or a long losing one. However, these can be handled with a proper money management system. There are many ways to handle the money management in a trading account, and we’re going to cover all of them here on the Trading Academy. By way of a short mention, the most popular one risks only a small percentage of the trading account (such as 1 or 2%) on any single trade; but there are also other risk-handling strategies that work nicely. The time horizon of a trade has a strong impact on its success. Patience is a crucial factor in any trade, and sometimes it is the only thing that makes the difference between losing and winning. If the analysis is made on longer timeframes, and the trade has its stop loss and take profit levels set accordingly, then just letting time pass should do the trick. Again, even if the stop loss is hit, with a proper money management system this will have little or no effect on the overall profitability of a trading account.

When traders can put a stop loss and take profit level on a trade, it means that a trading plan is in place. If this is true, then the trade should simply be allowed to take its time, otherwise the whole trading plan was made in vain. To sum up, I’ll end with the same EUR/USD position, which in the time during which this article was being written turned positive, and is now showing a profit. If a trader is never prepared to lose, and closes a trade every time a drawdown hits a position, then it is most likely that trading is not for that person.
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Planning a trade is one thing, and executing it is another. If you’ve bothered to make a plan, then simply execute it. The problem with Forex trading is that many traders are good at planning a trade, yet lack the proper execution skills. The bottom line is that money management and knowing yourself as a trader are so important – even more important than mastering technical or fundamental analysis.

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