When it comes to making money, people often think of a job. Jobs allow people to trade their time for money and happens to be what most people do. The problem is, you have only 24 hours a day, and not all of these hours can be spent working. Forex, on the other hand, is a business model that allows your money to work for you 24 hours a day.
Owning a business is the next reasonable way to make a living, but not everyone has an entrepreneurial spirit. Besides, business requires you to tie up most of your liquidity in inventory, supplies, labor, rent, etc. Anyone who does not already have a lot of money will need a loan, which charges interest.
Luckily, trading the foreign exchange market can be a reasonable and profitable way to earn an income. Forex (foreign exchange) trading is a popular method to make money using the money you have. It allows you to work from your computer, set your hours, and be in charge of yourself. The forex lifestyle is fun and can become your next opportunity.
Unlike a job, forex has no earnings cap. Forex trading is the process of buying or selling currencies to make money. Primarily, people will trade currencies to make money in the forex market.
The currency market can be a long-term solution to earning extra income. What forex traders do is use real money combined with technical analysis on a forex pair. After the review has been done, they will use their forex broker to make an educated decision on where to enter a trade, hoping to make a profit.
Forex and Casinos
Now, if you have never heard of how a casino makes money, you will be shocked. A casino offers people the opportunity to gamble their money with the hope of turning a profit. This is done through table games, slots, and more.
Casinos have what is known as the house edge over a game. Basically, on each contest, the casino will win more than 50% of the time on any game. Using basic mathematics, you will realize that a casino is not concerned with short-term losses. They are in it for the long-run.
Forex traders can learn a lot from casinos. In forex, you should not be worried about being correct 100% of the time while trading. A common misconception is that the only way to be profitable trading forex is to be right, but nobody is right 100%. In reality, forex is not about being right; forex is about being profitable.
How to Trade Forex
The first thing any forex trader should have is an internet connection and a computer. You will also need some cash to start trading on your account with, so make sure to have around $100-$1000, to begin with. If you do not have the money, to start with, consider a demo account as this will allow you to use the trading platform without any risk. A demo account can be a great way to learn.
Risk: Reward Ratio
A risk: reward ratio is a ratio that will define how profitable you will be trading the market. Before entering a trade, you will have to decide how much you are willing to risk to gain a certain amount.
For example, if I have three risks: reward ratio, this means that for every $1 I risk, I have the opportunity to make $3. As a rule of thumb, I keep my risk: reward ratio at a minimum of 5, meaning at a minimum, I need to be right two out of ten times to break even.
In simple terms, positions trading is when you set a stop-loss and a take-profit order based on your risk: reward ratio. I use TradingView connected with Forex.com to do all my trading. Combined, you can easily set your positions with the designated risk: reward ratio.
With positions trading, you are setting entry to the order first. This is where you first decide if you are going to buy (go long) or sell (go short) on the trade. After this, you will set your stop-loss and take-profit orders based on the risk: reward ratio.
Almost every broker will let you choose the appropriate risk: reward ratio. This is not something you need to worry about. What is more important is that you set the positions accordingly, and do not move them.
The reason you do not want to move your positions after setting them is that you are playing probability. If you only need to be right two out of ten times to break even, it will be hard for you to lose money long-term. However, if you start moving your positions, you mess with probability.
Technical analysis is where people use charts, indicators, patterns, to predict where the next move is. Using technical analysis, traders can give themselves a profitable edge over the market. Like a casino, this is the way traders can give themselves an advantage. When it comes to how to make money trading forex, technical analysis is what most people struggle with.
The critical part of using technical analysis is not to rely on one indicator or too many indicators. Babypips.com did a cool article about this, but indicators by themselves are usually not profitable. Forex is something that requires a strategy, not just one indicator will unlock the benefits of forex.
Instead, indicators should be combined with patterns and other technical analysis to develop a strategy. The strategy I use utilizes a combination of three components of technical analysis. Simple chart patterns such as the head and shoulders pattern, Elliot Wave Theory, and double tops are the first component.
The next component I use is the chart overlay Fibonacci retracement. Fibonacci numbers give great points to enter and exit trades on and are critical to the Elliot wave principle. Elliot waves tend to bounce off of Fibonacci retracements, so this is a good point to set your entry orders at.
The third component I will use is the RSI indicator. This indicator will let me know if the market’s trade volume is currently overbought or oversold. If all three of the components signal an entry, I will place my trade using a risk: reward ratio of 5.
Knowing all of this, you can make a decent income. I have now shown you my strategy and explained how to be profitable trading forex, so my suggestion is to go use a demo account. A demo account will let you test these strategies before ever using your own capital.
You can use forex.com to start trading with a demo account and see how profitable you can be using this strategy. You can also check out a few of my other articles such as: