Aspiring and new traders may ask;
Is Forex trading profitable? Before getting involved with it.
The simple answer is; yes it is. Forex trading is profitable if you have an edge in the market.
That is the caveat.
You need some kind of edge that will put the probabilities of success in your favor. Since without one, it is very unlikely to make consistent profits from trading Forex.
Most people that try trading don't have or haven't found an edge though. So consequently, this is why Forex trading is not profitable for them.
To help illustrate the situation further;
Forex brokers that are regulated in the European Union are required to publish the percentage of their client accounts that are losing money. At the time of this writing, you will see that this varies between brokers but it's roughly 70-80%.
Which means that Forex trading is profitable for the rest.
On the other hand, the Forex trading community estimates the proportion of losing traders to be higher. There is a saying that 90% of new retail Forex traders lose 90% of their account balance in the first 90 days of trading.
Let's be realistic about the profitability of Forex trading
It’s not realistic for someone with limited knowledge or experience to enter a highly competitive market place and be profitable from the get go.
Forex trading is very accessible and almost anyone can try it so it shouldn't come as a surprise that the success rate is this low.
You need to know what you are doing and have a competitive advantage to be profitable in Forex trading.
Forex Trading should be approached like any other business. Which involves having a certain level of knowledge, competence and experience to succeed.
Apart from that, Forex trading can potentially be very profitable for the other group of traders. This is because their profits derive from the other group’s losses.
Think about that for a moment! Forex trading can potentially be very lucrative for the other group of people.
It is challenging to be part of this minor group of people but is it worth trying?
Keep reading and let me help you figure that out.
How profitable is Forex trading?
Many will be deterred from Forex trading by the data mentioned above.
Then there are those who will rise to the challenge and try to buck the odds.
Let’s say that you want to be part of this minor group of profitable traders. How profitable Forex trading is (or is not) going to be depends on;
- Your Forex trading strategy, skill and experience
- Your buying power and the money you have to trade with
- How far the price or exchange rate moves
You are probably already aware that Forex trading is risky. With this in mind, lets explore how profitable Forex trading can be.
Forex trading is simply the buying and selling of foreign currency. How profitable a trade will be (or not) depends on two key variables. Which are price volatility and the deals lot size. In other words, how far the price can potentially move and how much was involved in the trade.
Below is a price chart of the Great British Pound versus the Japanese Yen (GBPJPY) for the entire year of 2019. Each price bar represents one days’ worth of price data. This is what the price did on any given day.
An indicator is also attached at the bottom of the chart. This shows the average true price range (red horizontal line) and the true daily price range (blue histogram bars).
This indicator shows us what the average daily price range was for the year of 2019. On average, this currency pair moved 125 pips per day. That is the average difference between the highest and lowest true price range for any given day throughout the year.
That doesn’t mean much on its own until each one of those pips has a value assigned to it.
Calculating how profitable Forex trading can be
The pip value depends on the lot size or the quantity involved in the exchange.
One standard lot is $100,000 of currency or equivalent. This would make each pip worth $10. So trading one standard lot with an average daily price change of 125 pips could result in changes in equity of $1,250 in a single average day.
125 pips x $10 per pip = $1,250
That could be profit or loss.
For more information about how pip values are calculated, please follow that link.
The same daily price moves can be worth more or less too, depending on whether larger or smaller lot sizes are traded. Further to that, it does also depend on whether a smaller or larger price move is captured between the buying and selling prices.
You can buy or sell whenever you like, so Forex trading can be very profitable under the right circumstances. The potential to profit (or the risk of loss) increases by increasing the lot size or the amount exchanged and by capturing larger price trends.
Granted, not everyone has $100,000 to trade Forex with but brokers do allow the use leverage. So you can trade with larger sums of money than the amount deposited in your trading account.
Which currency pair is the most profitable?
The most profitable currency pair is the one that offers adequate trading opportunities that also results in a profit.
Generally speaking, larger price swings can contribute to larger profits.
However, if more can be made from volatile currency pairs the risk of loss can also be just as much. Because price can also move against you.
Greater price volatility isn’t necessarily positively correlated with the currency pair being more profitable. But the lack of price volatility can reduce opportunity.
There is also something to be said about trading larger lot sizes with less volatile currency pairs. Profitability (or the risk of loss) can also increase under these circumstances too.
The point is that price volatility should be taken in to account. So lot sizes can be adjusted accordingly. Furthermore, lot size should be adjusted based on skill, experience and the size of the trading account.
Therefor, the most profitable currency pair is a consideration of:
- A traders comfort level and preferences
- What currency pair they perform best on
- Their ability to scale
Not the currency pair that is the most volatile alone.
Every currency pair has its own characteristics or "personality". The more familiar you are with any currency pairs price behavior the better you should do. Then you can scale and trade larger amounts.
Is trading Forex worth it?
Forex trading is a fascinating intellectual pursuit that can be very rewarding over the long term.
It takes a lot of time and effort to learn how the Forex markets work. Then to implement that knowledge correctly in real time to close profitable trades.
Many people would advise against trading Forex because it is risky. The odds are stacked against you too. That is true. But aren’t they for any business venture? Does that mean you shouldn’t take any risks and try?
Despite this, people are still attracted to start businesses and trading in the Forex markets. Just be prepared to sacrifice time, effort and probably money. Without any guarantees that you will be consistently profitable.
If you ask the minority of profitable traders, they will probably tell you that trading Forex is worth it.
You can trade whenever and from wherever you like and the possibility exists to compound returns over time.
Would you like to learn more?
Read some of the other articles and consider creating a demo account.