Forex currency trading is a popular option for people trying to make money online. And the main question on people’s minds before trying it is how much money can they make?
Fortunately, you don’t have to delve straight into the unknown. Trading for Dummies is here to help. This post explores how much you can make from foreign exchange trading and which factors should be considered.
What is Forex?
Forex – short for foreign exchange – is an online global market where different currencies from around the world are traded. It’s the biggest market in the world based on trading volume, which exceeds $5 trillion – or roughly £4 trillion. And, unlike some other markets, it’s a 24-hour market.
So, how does it work? In basic terms, users trade currencies by selling one against another. They seek profit from fluctuations in the value of a currency – and the consequent change in exchange rate. So, if the US Dollar (USD) is expected to go up in value, you could sell Pounds (GBP) against this and benefit from the rising value.
In this case, the GBP would be the base currency as it’s the one you’re using to trade, while the USD is the quote currency. The base and quote appear in pairs, with a price for the value of the base against the quote. So, if the price for GBP/USD is 1.13552, you will get 1.13552 USD for every 1 GBP you trade, much the same as physical currency exchanging for your holidays.
Naturally, if you’re trading GBP for USD, you want the USD to rise in value and vice versa. You want whichever currency you’re buying to rise in value – as that’s how you make profit. Much like currency exchange for your holidays, however, some of the rate will be taken away when you trade back, so you need to wait for a reasonable change before trading back.
How much can you make with Forex?
The amount you can make from Forex currency trading is potentially limitless. However, it depends on a number of factors, including the account size, risk level and trading strategy.
Firstly, your account size. As it sounds, this is the amount of money – or capital – in your account. Your risk is the proportion of this capital you’re willing to trade. Because no trade has guaranteed results, each of them is a risk. So, if you have £5,000 in your account, you might risk £50 on each trade, which would be a 1% risk.
Finally, your trading strategy can be assessed for profitability in a number of ways. Generally, the win rate and reward-risk rate are good ways to measure its success.
Traders should aim for a win rate above 50%, which means you win at least half of the trades. At the same time, you want your reward-risk rate to provide more profit on winners than losers. That way, when you lose on half of your trades, you make that back plus more on wins.
So, for example, here’s how things would look for a trader with a £2,000 account, 1% risk, 55% win rate and £30 reward versus £20 risk:
- 100 trades, 55 rewards of £30 and 45 losses of £20
- 55 x £30 = £1,650
- 45 x £20 = £900
- Net profit of £750 – which may be subject to commission
Try for yourself
If you want to try Forex exchange trading for yourself, we recommend XTB – the highest rated FX and CFD broker of 2018 – and eToro – the world’s leading social trading network. Each of these platforms provides their own guidance on trading, so be sure to familiarise yourself before getting started.