When looking into whether to embark on a new career opportunity or business idea, the question of how much money will be involved is normally high on the list of importance, both in the cost to start a new idea, and the expected return on investment (ROI).
While enjoying the process is equally important or even more important for some, many people are driven by the profitability of an opportunity, or level of potential income, as well as other perks such as the perceived job security, and of course any appeal and prestige of the work involved.
Foreign Exchange, like any other financial market involves economics, and appeals to those passionate about this field and who desire to be involved in the fast-pace world of finance.
FX Trading Still Being Discovered by new Market Participants
However, despite the attention on Wall Street and traditional investment vehicles like stocks, mutual funds, options, bonds, and treasuries, over recent decades, the Forex market still remains an uncertain realm for the majority of investors around the world.
That is despite the number of investors in FX, the stock market has its place in a large majority of portfolios’ belonging to households, whether individual or institutional investors.
The Forex market has made tremendous progress, however, in terms of its appeal and acceptance to traders, and the evolution of technology and regulatory mandates in different parts allowing regulated brokerages, such as worldwidemarkets.com to offer their brokerage services to retail and professional traders.
This progress is ongoing and creating the chance for new market entrants, and participants from other asset classes to switch over and/or start incorporating Forex trading into their portfolio or day-trading strategy.
Key Research Question: is Forex Trading Profitable?
While the main purpose of investing is to make money, this itself is a generality, as whether for the sake of diversifying capital and spreading assets across various classes of investments, at the end everybody wants to make more money yet the small details of how investing is approached will distinguish how, when and if the trading revenue results generate a positive net-income or a negative net-income.
What separates those who actually generate profits from those who end up generating losses, is the ability to set clearly defined goals and to have a trading strategy that will give them the best odds to achieve them, given the level of risk taken.
Therefore, whether a particular investment instrument or asset class is profitable or not, whether it be forex or exchange traded funds (ETF’s) really all depends for who, what, when, where, and how, and even the “why” can be of importance in understanding investors behavior and their subsequent results.
It’s no secret that Forex is gaining appeal to the retail market, as even the Bank for International settlements (BIS) referenced it for the first time, by highlighting the growth of this segment within the overall foreign exchange market, which on the retail side is continuing to expand its market-share.
When it comes to Forex trading profitability, data is available for a small portion of the market, for example in the U.S. where retail investors trade spot fx with regulated brokerages, these firms are required to report customer account profitability to the regulatory agency (the CFTC).This data shows that on average anywhere from 30% to 40% of a brokers’ active client base were profitable over a 3 month period, using an example recent quarter.
This indicates that a large percentage of traders are not profitable, over such a time frame., and highlights the challenge of trading, and how following the herd is a clear path to failure or less than opportune odds.
Forex trading has become more competitive as market evolves
The FX markets are not what they use to be, in terms of efficiency and duration of trends, as well as the number of trends going on at any given time.
A strategy that may have work for a given trend 10 years ago, could have been successful for many months at a time, whereas currently the trends might only last a few weeks, or could be affected by concurrent trends which overlap over various time frames.
For example, a longer term trend could be causing a currency pair to increase in price (relative to its base currency) but a shorter term downtrend may cause the pair to move in the opposite direction for an unknown amount of time before resuming the longer term uptrend. An example of this phenomenon of overlapping trends can be seen in the comparison below of a hourly chart with a daily chart for the GBP/USD as published on WorldWideMarkets Community Blog by Technical Strategist Edward Moya, author of Today’s Trading Edge:
At a closer level, this process of overlapping trends occurs on nearly all time frames commonly observed by traders, such as the monthly, weekly, daily, hourly, 30-minute, 15-minutes, 5-minute, and 1-minute time frames, as well as other time periods such as a 4-hour, 8-hour,etc..
These time frames provide forex rate data so that traders can analyze prices both in the current session and over the historical time frame, and using various methods such as technical analysis and mathematical indicators.
In essence, while it has become easier to access the FX market, thanks to available tools and technology and the regulatory framework as discussed above, the speed of market, as well as the growth of its size of trading volumes, has made FX a very competitive place.
Two Sides to Each Trade
Unlike most other investments which have a price that represents their value, Forex rates represents a ratio of the value between the two currencies involved in the pair (the rate that they can be exchanged). Because of this ratio, the value is determined.
In essence this provides the underlying rule that governs the transfer of capital in profit and losses, when they occur because of a change in the rates, since as the famous cliché saying goes, “no money is created or destroyed, it simply transfers hands.”
This saying aptly applies to FX, because there are always two sides to each trade, that is, when side A is buying, Side B is selling, and vice versa, therefore, unless the trade can be closed flat, with neither profit nor loss incurred to either side, the only other option is that side A will profit and the side B will therefore have a loss, or side B will profit and therefore side A will have the loss. Moreover, the amounts will be the same, (i.e. $1000 profit versus $1,000 loss, up for grabs).
However, because of the vast liquidity (ability to trade at any moment almost any amount) and thanks to risk management and the ability for one party to the trade to exit the trade without affecting the other party, it’s vital to understand how Forex trading works, in order to determine the answer to the question “is forex trading profitable?”
A trade highlights how Forex is both profitable and not-profitable, it’s all about what side you are on.
For example, if trader A wanted to buy 10,000 EUR/USD which involves purchasing Euros while Selling U.S. Dollars, expecting the USD to depreciate and thus more US dollars be needed to purchase Euros in the future (i.e. rise in price) , this would benefit the trader if it happened – since the Euros would enable the repurchase of an even greater amount of US Dollars later on, thus creating a profit. However if the price of the EUR/USD instead dropped, the lower price would cause a loss for the buyer.
In this case, Trader A goes into the market to buy EUR/USD at the available market rate, and whether dealing with a market-maker, bank, broker, exchange, or other individual trader, someone or some entity has to be willing to sell EUR/USD at the price that trader A is looking to buy, which we can say for example is EUR/USD rate of 1.3650.
For example if trader B, came along and just happened to be in a similar situation except wanted to sell EUR/USD at the current market price of $1.3650 for each euro, expecting the price to go down, thus anticipating the U.S. Dollar will strengthen against the EUR, and could enable a future re-purchase of an even greater amount of Euros as they would have become cheaper relative to the US Dollar, in a situation like this is Trader A and Trader B execute the trade at the same time, and are matched with each other, and can be said to be on the other side of each other’s trade.
When dealing with a regulated broker, whether the broker is a principal to the trader, or acting as an agent, or even matching with another trader, at the end you rely on your brokerage as the counter-party to your trade, and therefore dealing with a financial stable company, and reviewing the history of the management and regulatory track-record are prudent steps to take during the due diligence process.
Trade opened at 1.3650, then EUR/USD price decreases to 1.3500, what happens in a trade scenario?
- Trader A: Bought 10,000 EUR/USD @ 1.3650 = Loss of ($150.00) [1.3650-1.3500 =0.0150 * 10,000 = $150]
- Trader B: Sold 10,000 EUR/USD @ 1.3650 = Profit of +$150.00 [1.3650-1.3500 =0.0150 * 10,000 = $150]
In the example above, the profit of Trader B is paid for by the loss of Trader A, or looked at differently the result was simply transferred.
The same analogy could be applied to buying a house, a property that went up in value benefited the owner who had bought it, whereas the original seller has lost the increase they would have realized since selling it to the buyer. While this assume the original seller already owned the property before selling it, in Forex sellers can sell without already owning an underlying currency, similar if the seller in the above example had borrowed the property at a specific price, then selling it hoping that the price would drop in order to buy it back later at a lower price, which in the above case (with the value of the house increasing – would have caused a loss to the seller and profit to the buyer). While Forex trading is not like property, comparing the buying and selling as in the analogy above can help bring us one step closer to answering the main research question of this article.
The answer as to whether is Forex trading profitable or not? It entirely depends on the content and context where an investors’ performance can be measured. For a trader considering an asset class or financial market to focus their efforts on, Forex remains one of the best options with many attractive qualities such as the size of the market, the 24 hour nature of trading fx, and the available trading platforms, margin rates, and features that can give traders an edge, when compared to other markets.
Taking the next step in starting a Forex career, or shifting your trading to FX markets
Forex Blog recommends traders interested in Forex, as well as other available asset classes, choose a regulated brokerage like worldwidemarkets.com, which also caters to professional traders out of its U.K. based operation worldwidemarkets.com
In order to succeed in the FX market, or any market for that matter, a proper trading system or investment methodology, which contains specific sets of rules, and allows for the investing process – such as in a live Forex trading account – to be controlled and anticipated, must be development and tailored specifically to the unique needs of each investor.
As explained earlier, it’s not enough to just want to make money, how much, and how, and when you trade, and many other questions need to be detailed while pursuing the answer as to what degree “is forex trading profitable?”
More articles are available on ForexBlog.com, for example that detail such answers including to what is the Forex Trading System?