Online Forex Trading is the art of buying (or selling) one currency against another and profiting from the fluctuations in exchange rates of different countries. If you trade with rules and discipline, forex trading is not gambling and it does not depend blindly on luck.
This article is an introductory guide to teach you what you need to know in order to become a successful and profitable forex trader.
Note: This is part 1 of 3 of a tutorial series about online forex trading. Part 2 and part 3 can be found forex-2 and Forex-3..
Disclaimer: Online Forex Trading can result in substantial financial loss. Only trade with what you can afford to lose. If you don’t have risk capital then this is not for you. This article (and future articles) about online forex trading is meant for educational purposes only. I take no responsibility for any consequences you may incur after reading this article, and I give no guarantees that you will make money trading forex.
Online Forex Trading Earnings Potential
Before I start this tutorial about online forex trading, I want to show you that it’s possible to make very good money as a forex trader.
How much money can you make with it? It depends on the size of your account to define earnings potential in dollar terms, but as a good and cautious trader you can expect to make from 2% to 10% on your account every month. If you take risks and trade very aggressively (which I don’t recommend because it’s a good way to blow your account), then you can make close to 100% return in a month, i.e. double your investment.
To show you that I’m not making this stuff up and quoting expert traders, here is a screenshot of my own trading account that I opened with just $100 and the profits I made in just 30 days of trading.
As you can see you can start trading forex with just $100 or $1000 and build it up to an account size of thousands of dollars over 12-24 months if you’re a disciplined and consistent trader. I must say that I traded pretty aggressively with my $100 account in order to get an 85% gain in 30 days. This is not something I would continue doing because the risk of losing everything I made is too big. I just wanted to show you that it’s possible to make serious gains. ( I did do 53 individual trades so it’s not like I took one “double or nothing” trade, there was some skill involved and I even took a few losses when my trade went against me).
When you start trading with a small amount like $100 you will not be able to quit your day job any time soon but you have the potential to build your account to incredible wealth that will give you the financial and time freedom you dream of.
If you have the means to start trading forex with $10,000 or more, then you have the opportunity to quit your job, be your own boss and work from home as a forex trader.
Online Forex Trading
Trading Forex as a hobby or profession can give you incredible freedom and more money than you can spend, but ONLY IF you follow strict rules with huge discipline.
If you don’t have the discipline to follow strict rules, then online forex trading is just going to make you lose your hard-earned money and keep you glued to the computer screen for days on end. I’m telling you this because it’s the harsh truth, and I don’t want to lead you on in believing that you can make a fortune trading forex if you don’t know what you’re doing.
You don’t need to have any experience in finance to be able to make good money as a forex trader. You don’t need any financial degrees or qualifications. All you need is the curiousity to keep learning, some common sense and most importantly, discipline.
What Is Online Forex Trading?
The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. – Online Forex Trading
Every country has a currency and that currency has a certain value in other countries. For example, if you live in Europe you have the Euro and if you live in the United States you have the dollar. 1 Dollar is worth X amount of Euro’s or X amount of Pounds etc., but the values of currencies are constantly changing. This change in the value of one currency measured against another currency is what forex traders aim to take advantage of to make profits.
Basically, online forex trading means that you have a real cash account with an online forex broker (a quick search will yield countless examples) where you’re able to use your money to buy and sell different currency pairs to profit from the constant fluctuations in exchange rates between countries. You buy or sell based on your expectation of the movement of that currency pair after you’ve done your analysis. If your expectation is correct you’ll make money from your trade.
Why I Love & Recommend Online Forex Trading
It’s addictive and competitive.
I’ll admit that not everyone has a competitive nature, but I certainly do and there’s no better place to test my skills than on the most competitive place in the world, the forex markets.
Every trade is a test of your skills and your discipline. You have to stick to your trading rules, even when you make a wrong call and your trade goes in the red. It’s something that would make me excited to wake up for in the morning, because every day is different and has the potential to bring across some new profitable trades.
Gives you the chance to be your own boss.
After time has proven that you’re a skilled forex trader and not just someone who got lucky, you’re able to make enough money from the forex markets to cover your living expenses, and thus be your own boss. You can quit your job and decide on your own work hours i.e. work when you want and have time for your family or friends when you want. Sometimes you’ll work 12 hour days and sometimes you take a day off. It depends on your own profit goals you set for yourself.
Location independent & no commuting.
Online forex trading is done from any computer with internet access. This means you can work from home, your office or even when you’re traveling to other countries. There’s no need to spend hours commuting back and forth to work every day, which is a HUGE benefit.
It can be very rewarding financially.
If you have a good understanding of technical analysis and the discipline to trade according to a strict set of rules (most importantly: always setting a stop loss and never risking more than 5% of your account on a single trade), then you should continue to make consistent profits over the long run. As you account gets bigger, your profits do too. Online forex trading has the potential to make you a very comfortable living and give you enough cash to live your dreams.
How Does Online Forex Trading Work?
Due to different timezones, forex markets are open 24 hours a day with the exception of weekends. With “different timezones” I mean that at any time, either the United States, Europe or Asia is experiencing normal work hours (9-5), so there is always a part of the world open for trading. Thus, online forex trading is possible 24 hours a day, 5 days a week.
There are literally millions of people trading forex (and billions of dollars changing hands) every single day. Governments, banks, hedgefunds, mutual funds and private investors are all taking part trying to profit from the daily fluctuations in currency pairs.
Forex trading is always between 2 currencies only, and referred to as a forex “pair”. It’s possible to trade almost every type of currency, but the most commonly traded ones are:
- Great British Pound
- Swiss Franc
- United States Dollar
- Japanese Yen
- Australian Dollar
The Long & Short of Online Forex Trading
- With online forex trading, you have only two options; to buy or to sell.
- Currency pairs are always listed as xxx/xxx, for example the Euro against the Dollar is listed as: Eur/Usd.
- When you buy a currency pair, it’s called “going long” and when you sell a currency pair it’s called “going short”.
- When you buy a currency pair, you always automatically buy the first listed currency of the pair and sell the second listed one. Sticking with the example, when you buy (or go long) Eur/Usd, you buy Euros and you sell Dollars and that is called a “trade”. When you want to close your trade, you will have to reverse it by selling the same amount of Eur/Usd and you will be left with a net profit or loss.
- Movement in a currency pair is measured in “pips”. A pip is a 1000th of a % or 0.0001. You’ll notice that most currency pairs trade as x.xxx or xxx.xx. For example, Eur/Usd is trading at 1.4290 at the time of writing this article, meaning that 1 Euro is worth 1.4290 Dollars. If Eur/Usd moves up to 1.4300 it’s a difference of 10 pips.
The Hidden Danger of Online Forex Trading
You may be thinking that online forex trading sounds super simple. Buy low and sell high, or sell high and buy low and make constant profits. I mean, how difficult can it be when there are only 2 possible options: up or down. Doesn’t that mean that you have a 50% chance of being right all the time?
Forex trading is NOT easy. As a thumb-suck guess I’d say that 95% of people who try online forex trading lose their money or blow their account in the first couple of months or even weeks. If it was easy, don’t you think that everyone would be doing it, and that everyone would have tons of money?
Think of online forex trading as a very, very difficult computer game. The game is designed in such a way to make most of the participants lose their money, most of the time. But there are loopholes, and there are ways to really profit from the forex markets (up to such a point that you can have all the time and money freedom you ever dreamed of).
The main reason why online forex trading is so difficult and why so many traders lose money is because of the fact that your money is leveraged.
What this means is that you have the power to trade with amounts that exceed your capital by up to 400 times (the norm with most trading accounts is 1:100 leverage). So if you deposit an amount of $1,000, you have the ability to trade with amounts up to $400,000 and harvest the gains and losses from that huge amount.
Why is online forex trading leveraged?
Forex accounts are leveraged simply because it allows you to make far more return from your capital.
But leverage is a double-edged sword. You can make huge returns off small capital investments, but the losses pile up just as fast. Most people forget that the ability to make really big gains off small capital amounts works in reverse too, i.e. big losses from small capital amounts (translated as “going broke”).
When you take the principle of leverage and combine it with the lack of discipline to set a maximum loss limit for every single trade, and you have the reason why the majority of forex traders lose money hand over fist.
Let me give you an example of how leverage works:
When you do a forex trade, the size of your trade determines the $ per pip (I mentioned that movement in currency pairs is measured in “pips” which is a 1000th of a % or 0.0001).
- Let’s say your forex account is leveraged at 1:100.
- You do a trade of 50,000 long Eur/Usd (which is a trade size of about $5 per pip) 1.4290.
- Eur/Usd moves up to 1.4350 and you close your trade for +60 pips or $300.
- Because your account is leveraged at 1:100, you only needed $500 in capital to do the $50,000 trade on Eur/Usd.
- The 60 pip movement from 1.4290 to 1.4350 in Eur/Usd is only a move of 0.42% and 0.42% of $500 is only $2.10.
- However,you just made $300 from this trade and a $300 return on $500 is a HUGE 60% return on investment.
That is the power of leverage. It allows you to make enormous returns on small capital, but it also allows you to make enormous losses.
Trading brokers and banks need to protect themselves so that their clients cannot cause them to lose money. Thus, a client (you) can never lose more than the capital in his account.
A margin call is what happens when the losses of your open trades are getting so big and close to the size of your account capital sum that they are becoming a risk for your broker. At this point (usually a predetermined percentage of your account) you’ll be notified to either reduce your position size or add more capital to fund your open trades.
If the capital in your trading account can no longer cover the losses of your open positions, they will automatically be closed out and you will have lost the money.
This should never, ever happen to you, and that is why I’m going to give you a list of golden trading rules (further down in this article) that you must follow if you are going to be a successful and profitable forex trader.
You cannot risk more than 5% of your account on a single trade, because that is how you’ll end up in the poor house.
Online Forex Trading Techniques
There are various methods and strategies that you can use to be a profitable forex trader but the single most important concept is called “technical analysis”. Technical analysis is the study of price action (the charts) and predicting the future movement of currencies through patterns and systems.
Note: It’s impossible to predict the future, but with technical analysis it’s possible to predict movements in currencies and stocks to a high accuracy. Following perfect technical analysis will allow you to get 6 or more out of 10 trades correct on a consistent basis, and 6 out of 10 winning trades is all you need to be a profitable forex trader. (Win more than you lose).
I’m going to cover online forex trading techniques in the next post in great detail, but if you are interested in skipping ahead and learning more about technical analysis, these are the two best books available on the subject (I’ve bought them, read them multiple times each and highly recommend them if you want to start trading forex):
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How Much Money Can You Make Trading Forex?
I’ve already given you an indication of the amount of money you can make as a forex trader.
Realistically (and very conservatively) if you know your technical analysis and are disciplined to stick to your trading rules, you should be able to make a profit of 200 pips per month.
At $1 per pip (trade size of 10,000), it means you’d make $200 per month profit. I’d recommend trading at $1 per pip only with an account capital of $1000+.
At $10 per pip (trade size of 100,000), it means you’d make $2000 per month profit. I’d recommend trading at $10 per pip only with an account capital of $10,000+.
This is all just a very conservative estimate that I base on a trader who has good technical analysis knowledge and who trades very risk-averse with big discipline to always stick to their trading rules.
Online forex trading is not a game of greed, it’s a game of strategy, discipline and patience.
Just like with any business, you have to start small (in proportion to your account size) and build your capital up over time. As your account gets bigger, you can start doing proportionally bigger trade sizes and you’ll start making bigger profits.
How Much Starting Capital Do You Need?
As you can see from my earnings screenshot at the beginning of this article, you can start trading forex online with as little as $100 or $1000 and over time build that up to an account size of tens of thousands of dollars.
I would not recommend putting your life savings into a trading account if you don’t know anything about online forex trading. Heck, I wouldn’t even recommend doing that if you knew what you were doing.
ONLY TRADE WITH MONEY THAT YOU CAN AFFORD TO LOSE!!
Ideally it would be nice to have $10,000 in a trading account if you can afford it because it will allow you to start making profits large enough to cover basic living expenses, but if you don’t have that much money, you can start small and build up your account over time.
NOTE: Just because you have $10,000 in your account doesn’t mean you should risk $10,000. You can start risking $50 or $100 on trades, as long as you follow a system that allows you to win in the long term (i.e. making the same amount or more when you are right than when you are wrong). Remember that all you need is to be right 6/10 times to be a profitable trader.
I’m personally in the process of opening an account with eToro where I’ll deposit an amount of $500. I chose eToro because they are reputable, they have a very neat web-based trading platform and mobile trading app and on top of that they give one of the best new account bonuses available. If you deposit $1000 you’ll instantly receive a $250 cash bonus to your account.
I’ll go into detail about online forex trading techniques and how to get started with online forex trading (opening an account) in the next 2 posts. I suggest that you wait to read them first before depositing money but if you want to get a feel for forex trading, you can download a free practice account from eToro below where you’ll get virtual money to trade real markets with. (It’s a simulation, so you get $50,000 virtual money in your account that you can use to make trades on the actual forex markets in real-time without risking a penny of your own money).
P.S. I want to hear from you, so please leave a comment below or email me with any questions you have about online forex trading.