How to Trade Forex for a Living – Full-Time Forex Trading
Online trading attracts many retail traders dreaming of ending up earning their living speculating on the currency market. If you are ever wondering how to trade forex for a living and what it takes to make it on the currency market, you’re in the right place.
The art of speculation is older than money. Since people started to barter (exchange goods for their intrinsic value), there was always a bargain at one side of a trade. Modern speculation implies selling or buying currency pairs on the interbank market (the official name for the forex or foreign exchange market) and make a profit from their movements. The principle that applies when trading on the currency market is similar with trading any financial instrument. Or, in fact, with trading any in any market.
Consider buying a house, for instance. Some people buy a house to live in it, others to sell it for a higher price. If the price of the house rises in the next years, the one that bought it makes a profit from the difference (the selling price is higher than the buying price). The same happens in the currency market. If the EURUSD price rises and a trader bought it fifty pips lower, by selling it at a higher price, they make a profit.
In fact, this principle belongs to all financial markets, as speculation is the same. Hence, to make it in financial markets, one needs to understand the particularities of each market and then apply the old principles of successful speculation. The currency market is a special one. Because of its size, it’s impossible to manipulate an influence it.
But there’s a huge difference between trading currencies for fun and full-time forex trading. Few retail traders make this step, and this article focuses on what is needed to succeed.
How to Trade Forex for a Living
Because of the way the currency pairs move, rookie traders have the feeling this is a game. In fact, you could say a chart resembles a video game with all those candlesticks rising and falling.
But these are real traders with real money. Most of them are institutional investors (banks, hedge funds, pension funds, money managers, etc.) and central banks, as the retail size of the business barely exceeds five or six percent from the daily turnover.
Unfortunately, the market never forgives the ones who are unprepared, as most retail rookie traders lose their first initial deposit. The ones who don’t give up and are determined to succeed, start educating themselves and realize that trading forex is as serious as any other day job. Only when you’ve begun treating trading as a hobby, are you ready for the next step: full-time forex trading.
The Net Profit – The First Step to Full Time Forex Trading
Before anything, we need to cover the profitable aspect. Because most traders buy and sell currencies as a hobby, the amounts invested aren’t significant. That’s why the eventual profit…is not the real deal. More precisely, it isn’t the net profit, or what remains if the trader would do this for a living.
The first thing to consider is the difference between the entry and exit price. On a long position (buy), the exit price must exceed the entry one. The difference in pips is the profit, and the volume of the trade gives the value of it. The bigger the size, the bigger the profit.
On a short trade (sell), the exit price must be lower than the entry price. Traders bet on the currency pair declining, and if that’s the case, they make a profit. That is a gross profit. Next, from the gross profits, traders should deduct the associated expenses. Every trade has a cost, and it differs from trade to trade.
Commissions, swaps (interest rate differential for keeping positions open overnight), depositing fees, withdrawal ones, spreads, etc. they all represent costs to account for. Understanding the mechanics of successful forex trading starts with understanding the net profit.
It isn’t the one above! From what’s left, traders involved in full-time forex trading pay taxes too. Only what remains is the net profit, and it differs a lot from what the regular Joe interprets as one.
Start Treating Forex as a Day Job
This step deals with the trading mindset more than anything. No one says to quit their day job to become a professional forex trader. However, to become consistently profitable and to trade for a living, a change in how traders approach forex is needed. The change comes mostly from the psychological aspect of the trading game. Or, from the mindset.
Trading, in general, is not a one-way street. When compared with a day job, trading doesn’t have a guaranteed outcome. More precisely, it has an outcome, but it is either positive or negative. Working a day job, on the other hand, always ends up with a paycheck when the month closes.
Therefore, one of the crucial changes to learning how to trade forex for a living comes from how to approach the market. Treat it as it would be a regular job, and you’ll see a big difference in the outcome.
Starting Capital to Consider
The minimum amount to start forex trading differs when the monthly expenses depend on a trade’s outcome. For a rookie trader that buys and sells currencies for fun, the amount doesn’t matter much. But for full-time forex trading, the mounting pressure to make it each month isn’t good. The markets just do not move all the time, which means some months might be negative, or unprofitable.
Before focusing on how to trade forex for a living, think of the starting capital needed. Ideally, the money to trade with is separate from the funds required for day-to-day life for at least one, preferably two years.
This way, traders surpass the periods with drawdowns or with market inactivity, without feeling the pressure to make it. As the bills come every month, the pressure on the trader’s shoulders mounts to the point when he/she starts making terrible trading decisions.
Embracing Proper Money Management Strategies
Risk or money management makes the difference between making or losing money. A profitable strategy isn’t necessarily successful. Traders often paper-trade and interpret a strategy only in theory. Practice, though, begs to differ. Emotions like greed and fear intervene in the logical process and affect the outcome of a trade. Money management exists to help overcome the emotional rollercoaster.
Cash is King
Always keep a cash position in a trading account. It has a double positive effect as it provides free margin and avoids the opportunity cost of missing a new trade that might arise.
The easiest way to set a level for the cash position is to use a percentage from the equity of the trading account. If a trade is stopped, the percentage adjusts the cash position.
Avoid Overtrading – Correlations to Consider
People involved in full-time forex trading must avoid overtrading at all costs. The trick is to prevent intermarket correlations, especially on the USD pairs. Because the USD is the world’s reserve currency, most of the times the USD pairs move in the same direction. Buying EURUSD and selling GBPUSD at the same time is like hedging a trading account and won’t get you anywhere (unless it is a EUR specific move).
However, buying EURUSD on Monday and taking the profit on Wednesday, then selling the GBPUSD to profit from economic news, that’s a different story. It shows discipline and commitment to avoid overtrading.
Have a Weekly Trading Plan
How to trade forex for a living without a trading plan? It doesn’t necessarily need to be one related to the strategy involved, but a trading plan that considers the economic calendar for the week ahead as well as the money management strategy.
The economic calendar shows the upcoming data and the forecast. Traders position themselves accordingly, by avoiding trades around essential releases or simply waiting until economic data confirms a trend or not. Things like the daily and weekly fixing times, the price action during different trading sessions as well as central banks’ interest rate decisions affect the market’s volatility significantly. Traders must account and plan their actions to survive extreme market conditions.
Risk-Reward Ratios and Their Importance
The reward must exceed the risk (in most cases). The ratio between the two shows how much a trader expects to gain when compared with the risk taken. In full-time forex trading, the risk-reward ratio should exceed 1:2. Apparently, higher levels make it easier for the trader to face periods with drawdown.
Using risk-reward ratios is something that retail traders don’t do. If you’re wondering how to trade forex for a living, the best way to do so is to make a simple change in your trading style and constantly use appropriate risk-reward ratios.
Risk Only Percentages
Depending on the trading strategy, the stop-loss varies in size. Some trades require fifty pips, others a hundred, and so on. Traders face difficulties in setting the right risk, or the appropriate risk for every trade. To solve this issue, percentages exist.
The key is to risk only a percentage of the trading account on any given trade. That might be one percent, or two, whatever is comfortable with the trader and risk-appetite. Some traders are more conservative, others trust their trading strategy and believe it rarely fails, so they allocate more to every trade.
Using a percentage also helps in the case that something goes wrong. In a losing streak, the percentage applies to a smaller amount, making it difficult for the trader to lose the entire trading account. Professional traders that trade for a living always use percentages to define the risk. And, using an appropriate reward derived from the risk-reward ratio, they have a complete money management system.
Learn to Trade the Daily Charts and Above
Trading on the lower timeframes and for small profits is great. Scalping, as it is named, appeals to rookie traders. When involved in full-time forex trading, professional traders let the market come to them. And, they let the profits run, as well as they cut the losses when needed.
Put it simply, the lower timeframes are for amateur traders, the bigger ones for professionals and alike. Unless trading for a living comes from running an expert advisor (trading robot) on lower timeframes, a full-time forex trading strategy comes from interpreting the daily and higher timeframes to avoid the “noise” in the market.
The Advantages of Using a Skilled Trading Mentor
It is not by chance that we left this point at the end of the article. Perhaps the most important step of all that helps a retail trader to make the leap from rookie to professional is to enroll in a private mentoring program.
Successful traders do exist. They trade on the more significant timeframes and have plenty of time on their hands. Moreover, by teaching other traders to be profitable, they stay up-to-date with the markets and don’t lose contact.
There are two options to learn how to trade forex for a living, both of them expensive. One is to learn on your own, to fight for each pip and, down the road, to lose money trading. Some view it as tuition for learning to trade, but it doesn’t have a guaranteed result at the end of the tunnel. Many traders give up in desperation.
Another way is to use a skilled trading mentor. It costs a lot (cheaper programs must be avoided), but the trader saves in the most important currency of them all: time, the currency of life. Above all do your due diligence.
Trading for a living is like fata morgana. In periods with success, it seems like you’re almost there, ready to make the leap to full-time forex trading. Some other times though, the market tests you so much from a psychological point of view that many traders burn out. They don’t feel the energy to trade anymore, and are sick of all the losses.
Following the steps described in this article make the process easier. Traders should know that trading is not a video game, but neither is it casino. With the right strategy and money management approach, but also with the right mindset, anyone can end up being engaged in full-time forex trading.