How to make money trading forex

Forex, or foreign exchange trading, is a marketplace that has captured the imagination of retail traders over the last several years. This is a market that is based upon the price of currencies about each other rising and falling. For example, you may find that buying the Euro and selling the Japanese yen to be a profitable trade.

If you are a trader that likes to follow world events, the Forex markets might be for you. That being said, Forex trading is not a simple "get rich quick scheme." Like any other type of investing, it takes a certain amount of work and study. For that matter, it even takes a little bit of luck at times.

How to become profitable

Despite what you may or may not have heard, Forex trading is not about getting "Lambo money" overnight. It is a serious endeavor like any other type of investing and therefore you need to keep a few things in mind. The first thing of course is whether or not your strategy is going to make money over the longer term. You must test it through historical data, a practice known as backtesting. If it is not profitable, there is no point in pursuing it with that particular system.

Another major step forward is going to be whether or not you practice money management. Money management is the process of making sure that no particular trade takes a huge chunk out of your account. While it might be exciting to think of making a 20% gain on a quick trade, a profitable trader will also realize that it could just as easily take a 20% loss. Position sizing is crucial.

Make sure that your risk to reward ratio is significant. You should never risk more than you are likely to gain. For example, if you enter a trade buying the US dollar against the Canadian dollar, you should not be trying to make $100, while risking $500. As a general, you should try to gain two units of currency for every one unit you risk at the very least.

Understand that narratives in the market typically appear after the initial move has been made, therefore chasing the "hottest move" will quite often be far too late to make any significant gains. Markets are about moving towards where we are heading, not chasing a move once it has already been made.

Statistics are against retail traders, but simplicity wins the day

Statistically speaking, retail traders tend to lose money over the longer term. There are stats out there that suggests only one-third of traders maintain their accounts over the long term. Even fewer traders are profitable over the years. That being said, it should be noted that most of the money to be made is done through managing your risk.

Keep in mind that once you place a trade, it is up to the market as to whether or not it goes in your direction. This is why risk management and stop loss placement is crucial. You need to be able to accept that not every trade will be a winner, but also know that over the longer term you are going to make money. If you understand this, then it is simply a matter of the "law of large numbers", when statistics tend to revert to the mean. If you have an average profit of 20% per year, assuming that you follow the same system, those results should more or less end up being true. Yes, there will be times where you will make more, and times where you will make less, but in the end, you become somewhat comfortable with your results.