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If you’re a full-time trader, you’ll know that the forex market and similar entities are incredibly volatile and provide a difficult environment in which to achieve a viable profit.
To this end, some 70% of all forex traders lose money over time, while some historical estimates have elevated this figure as high as 90% (although the rise of automated trading may have helped to reduce the number).
But why is the profitability so important in forex, and what steps can you take to become a more financially successful trader over time?
Why is Profitability Important?
This may sound like a question with an obvious answer, but incrementally increasing your profitability affords you more disposable income and consistently higher returns over time (in line with a scaled investment).
If you’re a part-time trader, trading your efforts and profitability may also help you to engage in forex or CFD trading as a full-time career, enabling you to live a more flexible lifestyle in the process.
Overall, optimizing profitability ensures that you bank as much as possible from your trading endeavors while it also builds confidence and establishes the practice as an increasingly viable career option.
How to Optimise Profitability?
The question that remains, of course, is what steps you can take to maximize your trading profitability. Here are a few to keep in mind:
- Prioritise Risk Management: This is arguably the most important factor as a trader, as minimizing risk helps to cap financial losses and boost the amount you can bank as profit. Fortunately, there are numerous tools and techniques that you can use to reduce your exposure to risk, including diversification (we’ll touch further on this below) and so-called “stop loss” tools. The latter cap individual losses at a predetermined amount, automatically closing positions once they’ve reached the relevant threshold – this allows traders to worry less about their trade decreasing in value by large amounts and making a huge loss. For example, in foreign markets, there could be global news that shifts a currency, while in your country, you are asleep, none the wiser. Here, a stop-loss order will give you a safety net. When considering the risk management of your forex trading, you should also look at the risk: reward ratio of your trades. This calculation allows you to identify the potential risked stake of a trade and the potential gain, then using your judgment, you can see whether the potential reward of an investment or trade is worth the possible loss.
- Understand the Role of Diversification: On the topic of diversification, it’s imperative that you look to spread your capital across a broad range of asset classes and markets. It automatically minimizes your exposure to risk, while ensuring that you’ll avoid a scenario where your capital holdings will reduce markedly at once. In the case of currency trading, this means spreading your capital across selected major, minor and exotic currencies within a broad portfolio. Diversification over a range of currency types will allow you to utilize a range of major currency pairs to make a more steady and predictable return while putting a smaller amount of investment into much more volatile exotic currency pairs, a channel that allows for much bigger gains, but also losses, so this needs to be used in proportion to its risk.
- The Importance of Research and Learning: Knowledge and understanding are your key weapons as forex or financial market traders, as they build a foundation of insight that informs your trades and creates an underlying sense of determinism. This recognizes the underlying laws (including macroeconomic and geopolitical factors) that govern change in the market, which in turn makes it much easier to adhere to trading strategies and avoid emotive trades. These factors can include a close inspection of countries economic performance, predicted recessions or growth periods in a selected country and upcoming political elections, all of which will ultimately have an effect on the foreign exchange market. You can also learn how to apply theoretical knowledge by using a demo account to gain risk-free, practical trading experience in a simulated marketplace, allowing you to get a feel for how the trading process feels with demonstrative money and trades. This experience can then be directly translated over to when you start trading with real investments.
Are there any types of trading that are most profitable?
During intraday trading, the stocks are bought and sold on the same day before the market closes. The entire day should be spent tracking your market position and looking for a good time to sell your stocks. If you invest in the right stocks, intraday trading can be a great way to make fast profits.
What is the average time it takes for a trader to become profitable?
According to some, becoming consistently profitable takes about five years. To put it another way, you’ll need to study for more than 10,000 hours. To gain the required level of knowledge and feel comfortable, you must devote enough time to studying market behavior.
Is it possible for me to become a trader on my own?
If you’re patient and understand that it will take time, you can learn how to trade without a course. You will have to pave your own path to success in trading because it is a competitive industry.
What are the easiest to trade?
An order to purchase or sell securities (such as stocks) at the current best market price is referred to as a market order. To buy and sell shares quickly and easily, market orders are the most common type of order.
To become a day trader, how much money do you need?
To start with, pattern day traders must maintain a minimum equity balance of $25,000 in their margin accounts on any day when they day trade. Before engaging in day trading, you must have a minimum amount of equity in your account, which can be a combination of cash and eligible securities.
Thank you for reading!