How familiar are you with the Forex Market? Before you can make money, focused training will be necessary. If you plan to trade Forex yourself, you will need to learn how to make money in Forex. The knowledge and skills do not come automatically, or intuitively.
Why should you listen to me? I studied Forex trading for three years and now trade regularly. I have consistently made profits of over 100 trades in a row. In future posts, I shall be sharing the methods I use to be a successful Forex trader.
Your first step is to get educated on how this market works. What are the pros and cons? Just like you can make a great deal of money in Forex, you can also lose a lot.
However, if you train yourself correctly, you can make your winning trades exceed your losing ones. Losses are unavoidable. As simple as it seems, all you need to keep in mind is the magic formula.
The Magic Formula
Winning Trades – Losing Trades = Profits
You may guess that this formula applies to any form of trading. Not only Forex.
The million-dollar question is not only how do you make this happen, but how to do so on a consistent basis.
Do you want to learn how?
It is going to take discipline and persistence. This is a good opportunity to read the following post on how to change your habits to increase your probability of success: The Secret.
What You Will Learn By Reading On
The main purpose of this article is to share with you the fundamentals of the Forex Market and what you need to do to learn how to trade successfully. And answer the question, “How To Make Money In Forex?”
This will be a part of a series that will take you deeper into the mysteries of Forex trading, one step at a time. You will need patience and resolve to do whatever it takes to make the magic formula work for you.
Are you ready to dive in?
Why Trade The Forex Market?
There are many good reasons to trade the Forex Market. I’d like to share 7 reasons below.
- It is by far the largest trading market in the world, In US Dollars it is at 2.4 quadrillion!
- Over 6.6 Trillion Dollars are traded daily in Forex, compared to 173 Billion on the NYSE
- There is no centralized center for Forex Trading
- You can trade from anywhere using your computer 24/7 excapt for 48 hours over the weenend
- Spreads are very low compared to the Stock Market keeping the cost for trading low
- You can open a trading account with most major Forex brokers for as little as $200
- All brokers allow you to trade using a demo account until you feel confident to transition to real money
Forex trading is where you trade the value of one currency pair against the value of another.
Let’s use the Great British Pound (GBP) vs. US Dollar (USD) as an example. I’ll use a trading amount of $1000.
If your analysis revealed to you that the Pound was going to increase in value compared to the Dollar, you could use all that $1000 to buy Pounds. When the value of the Pound increases in value by say 5% and you are happy with that profit level, you can sell for a profit of $50.
Most traders stick to the following currency pairs that are supported by most brokers. One of the reasons being all these currencies are stable.
List Of Major Currency Pairs
|Currency Pair Names||Currency Pair Abbreviations|
|US Dollar / Canadian Dollar||USD / CAD|
|Euro / US Dollar||EUR / USD|
|US Dollar / Swiss Franc||USD / CHF|
|Great British Pound / US Dollar||GBP / USD|
|New Zealand Dollar / US Dollar||NZD / USD|
|Australian Dollar / US Dollar||AUD / USD|
|US Dollar / Japanese Yen||USD / JPY|
|Euro / Canadian Dollar||EUR / CAD|
|Euro / Australian Dollar||EUR / AUD|
|Euro / Japanese Yen||EUR / JPY|
|Euro / Swiss Franc||EUR / CHF|
|Euro / Great British Pound||EUR / GBP|
|Australian Dollar / Canadian Dollar||AUD / CAD|
|Great British Pound / Swiss Franc||GBP / CHF|
|Great British Pound / Japanese Yen||GBP / JPY|
|Swiss Franc / Japanese Yen||CHF / JPY|
|Australian Dollar / Japanese Yen||AUD / JPY|
|Australian Dollar / New Zealand Dollar||AUD / NZD|
The Power Of Leverage In Forex
It may seem risky to use all of that $1000 on one trade. And you would be right. The Forex market has a leveraging system where you can use smaller investment amounts to control large amounts of money.
A good practice for trading is to use Stop Loss and Take Profit setups that when used with good risk management, can limit one’s loss exposure. Hence, it is possible to make a lot of money over time using a small investment.
I have oversimplified the process just to make a point. The same principle applies to trading stocks. The object is to buy low and sell high. If it was that easy to predict the direction of the market. Everyone would be trading. But it is not.
Although you can use all kinds of analysis and chart patterns to help use history to give some idea of future direction, nobody can predict the future with certainty. It comes down to how good one is in analyzing the markets and using sound principles to make trades.
Understanding The Power Of The Pip!
Pip is an acronym for “percentage in point” or “price interest point.” A pip is the smallest price move that an exchange rate can make based on forex market convention. Most currency pairs are priced out to four decimal places and the pip change is the last (fourth) decimal point.
Trades are placed in Lot Sizes. The minimum lot size is a micro lot. Or 0.01. Moving upwards we have the mini lot or 0.1. Lastly, we have the whole lot, or 1. Lot sizes can be selected using increments of .01
Trading Using Micro Lots
When you trade using micro-lots (0.01), one pip movement in the currency pair traded is the equivalent of approximately 10 cents. Hence, if the pair you are trading moves upwards in the charts, a rise in one pip would be a gain of 10 cents. And if the move was downwards, the value of your trade would decline by 10 cents for every one pip drop.
If you set a take profit level of 100 pips and a stop loss level of 50 pips, you could either make a profit of $10 (100 pips x 10 cents) or a loss of $5 (50 pips x 10 cents)
Trading Using Mini Lots
When you trade using mini-lots (0.1), one pip movement in the currency pair traded is the equivalent of approximately $1. Hence, if the pair you are trading moves upwards in the charts, a rise in one pip would be a gain of $1. And if the move was downwards, the value of your trade would decline by $1 for every one pip drop.
If you set a take profit level of 100 pips and a stop loss level of 50 pips, you could either make a profit of $100 (100 pips x $1) or a loss of $50 (50 pips x $1)
Trading Using Whole Lots
When you trade using a lot of 1, one pip movement in the currency pair traded is the equivalent of approximately $10. Hence, if the pair you are trading moves upwards in the charts, a rise in one pip would be a gain of $10. And if the move was downwards, the value of your trade would decline by $10 for every one pip drop.
If you set a take profit level of 100 pips and a stop loss level of 50 pips, you could either make a profit of $1000 (100 pips x $10) or a loss of $500 (50 pips x $10)
The most important action you must take in Forex trading, or any kind of trading for that matter is the use of RISK MANAGEMENT! Those who ignore managing risk, are in danger of losing all their capital.
Having addressed the options of trading using different lot sizes, this is a good place to address the importance of managing risk. Some methods apply to all sizes of capital, ranging from as low as $100 to as high as in the millions.
Other methods are dependent on the total amount of capital you have to trade with.
Risk Management For All Levels Of Trading Capital
Maximum Loss Exposure
The most you should ever risk on one trade is 2%. So for example, if your capital was $10,000, 2% would be $200. Hence, you should never risk any more than $200 per trade.
Meaning you can place a single trade using 2 lot sizes and set a stop loss of no more than 20 pips. If the trade required a larger stop loss then the lot size would have to be reduced.
Ideally, it is prudent to limit the maximum loss to 1%.
When you are making multiple trades. you should set your maximum loss for all trades at 5% of your capital. Using the same $10,000 capital analogy, if every trade went against you, your total loss should not exceed $500.
The logic of this concept should be clear. If you ignored applying good risk management and lost $5000 in one day’s trading, how would you feel; compared to losing $500? It would be devastating.
Although I used $10,000 as an example, the same principle applies to a trading capital of $1,000.
Profit To Loss Ratio
It is strongly recommended that every trade should have a minimum take profit to stop loss ratio of 2:1. For example, if you set a profit target of $100, your stop loss should be no more than $50. If you can set it at less than $50, the better.
Since Forex trades can be very volatile, you need to give your trades room to move about. This is what dictates at what level your stop loss must be set.
We are moving into advanced concepts that I will be addressing in future posts. Hence I won’t go into more detail on this subject here.
Risk Management For DIfferent Capital Levels
When your capital amount is say $1,000, limit your lot sizes to no more than 5 micro-lots (0.5) I strongly recommend when you are starting out, never set trades using lot sizes greater than one micro lot (0.01).
You are going to have more trades go against you than in your favor. Let’s say you have a series of losses as follows in pips. 50, 20, 30, 100.
At 0.01 lots per pip, your losses would be $5, $2, $3, and $10 respectively. For a total of $20.
If you had set your lot sizes at 0.1 hoping to make a bigger profit, look what could happen if the same trades were made with the same losses as above.
At 0.1 lots per pip, your losses would be $50, $20, $30, and $100 respectively, for a total of $200!
I grant you if the trades went in your favor you would have made a cool 20% in profit. Your $1,000 would have grown to $1,200.
Ask yourself, would it be worth the risk for an account with a capital of only $1,000?
When your trading capital is larger, you have the option of setting up trades using higher lot sizes. This will be the topic of future posts, hence I won’t go into more details here.
Fundamental Forex Education
I am going to introduce you to a site where you will learn more about Forex. Click the BabyPips graphic below to enter the School of Pipsology!
How To Trade Forex
You have two options itemized below.
1) Do It Yourself
It is paramount that you learn as much as you can about the technicalities of trading as well as the personalities of the various currency pairs. Many Forex trading companies will allow you to open a demo account for free to practice first before you make a deposit to open a cash account.
Even after you open a cash account, it is advisable to continue one’s demo trading and gradually start to use real money in very small increments.
2) Done For You
In this scenario, you join a trading company for a monthly fee to have access to trade recommendations made by experts. You will get details of trades to make typically one or two a day.
These details will provide you with all the information to execute a trade with your Forex brokerage company. You will be told the currency pair, what stop loss to place and what take profit to set. The amount you use will depend on your trading capital and what you can afford to lose.
Yes, I can guarantee you will lose money. The goal is to win more than you lose, per the “Magic Formula” so you end up in profit.
Even when you go this route it is still prudent at first to make these trades using a demo account. Once you feel confident that you are making a profit on average, then start with real money. But start with micro-lots. Then move to mini lots.
There are so many ways to trade. It is best to try as many methods out as possible during the demo trading period. The goal is to find a system where out of 100 trades you make a profit that meets or exceeds your goals.
Say, for example, that profit goal is a minimum of 0.5% per trade and stays that way consistently, then you have developed a system.
So if you have only $1000 to invest per trade and on average you earn a profit of 0.5% on every 5 trades that you can sustain for 100 trades you will earn $100, This is a 10% return on capital in a relatively short time.
However, the benefit of a successful system is it can be scaled up. If your capital was $10,000 after 100 trades your earnings using the same metric would be $1,000.
There is one major takeaway. Your success or failure is based on your own efforts. There are no guarantees. However, by following the advice of expert traders the probability of success is higher than if you went it alone.
1000 Pip Builder
This is the company that is perfect for beginners. Here is what they have to say:
Join 1000pip Builder Now by Clicking the Panel Below
You will be provided with several subscription options. Pick one that is right for you. The important goal is to start learning about Forex Trading right away so that you can learn to become successful at it to help you replace your day job.
Just imagine, trading for a couple of hours a day or night, from home instead of driving to work, fighting the traffic, and working for 8 or more hours to make someone else rich.
However, by joining 1000pip Builder you have the option of using the trading signals they give you to start making a profit right away. I would still recommend that you learn to trade yourself so that you do not become dependent on others as well-meaning as they are.
For transparency, if you join 1000pip Builder as a paid member I shall receive a small commission to help support my website. The cost will be the same regardless of whether you went through my site or directly through them.
Selecting a Forex Broker is something that you must make a decision for yourself. You need to research Forex Brokers to find one that meets your comfort zone. However, I shall provide you with a couple of suggestions to give you a starting point. In future posts on Forex, I shall provide reviews of some of the major Forex Brokers available.
Oanda and Forex.com are both reputable brokers. They offer the well-proven Forex Trading Platform, MT4. Click the banners below to check them out:
Click the Banner below to get to their website.
How To Make Money In Forex
Finally, I get to address the question of this post directly. You should have come to the conclusion that it is very hard to make any decent money in Forex with a small trading account.
A good Forex trader can earn at least 1% a week. This adds up to over 50% a year! Wall Street traders earn huge salaries for generating only 10% annually! The point I want to make is, earning 1% a week is a HUMONGOUS DEAL!
The stark reality is with a small account of $1000, 1% a week will provide you with an income of $20 weekly. Yuck! This is one of the reasons why traders with small accounts throw caution to the wind and ignore risk management.
Using only micro-lots per trade, it would take forever to build up an account to even $10,000. The temptation to ignore risk management and use lot sizes of 0.1 and higher is very high.
Sadly, being inexperienced and letting emotion enter the picture is a sure way to lose all your money. By now you’re probably getting very discouraged about Forex trading. Unless you have $100,000 in your bank account that you are willing to risk.
I have a solution to this challenge. Here is what I recommend.
Three Step Solution To Making Money In Forex
Step 1 – Learn everything you need to know about Forex Trading
Step 2 – Open a demo account to practice trading Forex
Step 3 – Find something else to build up your trading capital
Rest assured that I will be helping you with all these steps.
Step 1 – The School of Pipsology is a good starting point to begin your Forex education. In future posts, I shall be teaching you secrets that I have learned that work well for me.
Step 2 – I have given you examples of two places where you can open a demo account. There are many more places to consider that I will also be addressing in future posts.
I want to thank you for taking the time to read all the way to this point. In return, please accept an eBook copy of the iconic self-development work by Napoleon Hill called, Think and Grow Rich. Fill in the form below to download it to your computer.
I highly recommend that you check out the world of Forex Trading if you want to create a means to add extra money to your life every week. This is a fantastic alternative. You can start with a demo account and do paper trading.
As you demonstrate to yourself that you can make consistent profits either with you trading or using the trades recommended by1000pips Builder, you will be entering a new world of financial freedom.
The beauty of this journey is you start with demo money. Then graduate to small cash accounts. Once you prove to yourself that you can come out ahead every month, move up to even larger cash accounts to trade.
If you follow my instructions above, you will learn how to build your cash account to really make money in Forex.
When you fill in your info into the form above, I will be able to send you emails as I publish more articles on Forex on this website.
Please leave me any questions or comments below.
I wish you much success in your Forex trading activities.
Your friend and future mentor.