How do you REALLY make money in forex trading?
Firstly, and most obviously, people trade the forex markets to make money.
So, that’s nice – but how do you really make money from it?
Basically how it works is that you open a trading account (with a recognized broker), you invest your own money and then you trade it yourself. You are responsible for your wins and also for your losses.
In forex trading you make money by buying and selling foreign exchange currencies.
The fantastic part about forex trading is that you can make money on a buy order AND you can also make money on a sell order. In stocks trading, you buy shares, and then hope that you’ve done your homework properly and that the value of the shares rise so that you can sell your shares and make money.
With currency trading, currencies are always stipulated in currency pairs. In every foreign currency exchange transaction, you are buying one currency and simultaneously selling another.
If you are completely new to all of this you probably thought that the currency in your country has two digits after the decimal place. But surprise! they actually have 5.
The Japanese Yen is the exception and only has 4.
A pip is a point in percentage.
In forex trading, all you are doing is trying to collect these tiny units of currency which are called ‘pips’. As the markets move, the pip value changes and so essentially you either gain or lose the amount of pips that the currency pair has moved, and this is how you make money in forex trading.
Think of it as if you are going on a trolley dash in a jewelry store.
The more jewels (pips) you can grab and stash in your trolley, the more ‘money’ you have to take home. Awesome.
If you think that the Euro is going to get stronger against the US Dollar, you BUY Euro.
When it reaches your ‘take profit’ level which you learn about, you would have collected a certain amount of pips and this is real money.
See below: right now, don’t worry about the technicalities. Just look at the image and see what the graph is doing
In this example of EUR/ USD, if you bought where the pink rectangle is and exited your trade at The Girl Trader’s happy face, you would have made money.
HINT: Notice I said above ‘íf you think’ – that means taking the knowledge you would have learned on a trading course and applying it; don’t guess which way it’s going to go. By doing a course you learn to determine which way the market is most likely to go.
If you are guessing, then you are gambling.
If you think that the Canadian Dollar is going to decrease against the Japanese Yen, then you enter a sell order.
In this example of the CAD/JPY: if you enter a sell trade where the purple rectangle is and exit your trade at The Girl Trader’s happy face, you would have made money. Ahh good times!
How much money can you make in forex trading?
Very very basically, this depends on a few factors such as:
*Your risk appetite
*Your trading strategy
*Your account size
Essentially when you trade, you determine how much you are risking per trade before you place the trade.
And everything is calculated in those pips that I was talking about earlier.
So you can risk anything from $0.10 and more PER PIP following your rules and strategy. So if you have a small account of $500.00 and you collect 100 pips at $0.10 per pip, you would make $10.00
However if you have a larger account of $3,000.00 and you risk $1.00 per pip and you collect 100 pips, you would have made $100.00. Nice.
So that old saying does run true: it takes money to make money.
This does exclude your losses, and everybody loses from time to time – even the big boys.
So if you are not a millionaire then I really recommend that you do a) a forex trading course with reputable trainers who can also trade and start off with a demo account and practice on this.
Or b) start off with a small account of about $250.00 so if you lose, you will only lose about $2.00 in a trade.
I am not a millionaire yet – and therefore one of my biggest goals is to CREATE money that I can put into my trading account so that I can trade larger amounts – and at the end of the day, I will take home larger amounts.
It’s all in the numbers.
PS: update 04 March 2018: Have a look at this post to find out about a fantastic opportunity to auto-trade and copy an institutional trader on his way to a million!