How Does Forex Work and Does It Really Work?
Most of those who ask “How Does Forex Work?”, don’t care about the technical aspect of Forex trading. They want to know whether it really makes money or not.
People start learning how to trade Forex, because they want to make money. Many of them want to make a living through Forex trading and look for having a source of income through Forex trading. They want to become full time Forex traders who trade Forex to make a living.
Some others look at Forex trading as an investment opportunity to increase their wealth.
Now the question is whether Forex really works for these people or not.
Before I answer this question, I’d like to explain a little about the technical aspect or Forex trading and how Forex works behind the scene.
How Does Forex Work Technically?
Forex or Foreign Currency Exchange is the business of exchanging the currencies against each other for the purpose of making profit. This is what Forex traders do. They buy and sell the currencies against each other to make profit when one currency’s value goes up or down against the other one: What Is Forex and What It Is Not?
Some others, offer a currency exchanging service to those who need to convert a currency to another. For example, tourists have to buy the destination country’s currency. The money exchange agency charges some fees to exchange the currencies to each other for them. You can do this through the banks too, but the private money exchange agencies are used to offer better prices: How to Run and Manage a Money Exchange Business that Makes Money
Forex trading is not something new. Its history is as old as the history of money. But the way that retail Forex traders trade currencies now, is somehow new. It is done electronically and through the Internet. It is almost 100% automatic and it needs no human touch to complete the exchanging process.
To trade currencies against each other as a retail Forex trader, you have to open an account with a Forex broker. More professional traders, trade through the bank accounts that needs more capital. They buy and sell currencies against each other through a trading platform software, or through their online banking account.
In this article, I don’t want to focus on the technical aspect of Forex trading. There are some articles and videos on this site that explains this: Forex Trading Explained in Simple Words
Here, I’d like to focus on this question that how does Forex work to make money for Forex traders. And, how Forex traders can make money with it and whether it is really possible to make money with Forex or not.
How Does Forex Work to Make Money for Retail Traders?
Theoretically, retail Forex traders try to predict whether a currency’s value will go up or down against the other currencies. If they conclude that the value of currency A is going to go up against currency B, then they will buy currency A against currency B. It means they pay currency B to receive currency A.
In case they are correct and the value of currency A really and reasonably goes up against currency B after a while, they will convert currency A to currency B. The price difference makes some profit for them. This is how Forex trading makes money for Forex traders theoretically.
Now the question is whether this process results in profit in reality and actually or not. Can the Forex traders make money consistently? Is Forex trading a good and stable source of income? Does it really make money as a full time job?
There is no doubt that the currency market is a big opportunity to make money. There are so many who make a lot of money through this market.
However, to make money through currency trading, a retail trader has to have two things:
- He has to master a trading strategy.
- He has to have money to trade with and make more money (profit).
Mastering a Trading Strategy
There is no special and clear way to master a trading strategy. While it is hard and complicated for most people, some others can do it after a while of learning and practicing. I personally believe that mastering a trading strategy and then making money as a professional trader has four stages:
- You have to choose a trading strategy and learn the related basics and technical parts.
- You have to demo trade the trading strategy until you become a consistently profitable demo trader who makes profit on the demo account consistently and consecutively. To make sure that you have reached this level, you have to repeat your success for 6 consecutive months at least.
- After becoming a consistently profitable demo trader, you have to try the same trading strategy on a small live account to make sure that you can repeat your success with real money too. To make sure that you have gained such an ability, you have to repeat your success at least for 6 consecutive months here too.
- You can trade with a bigger account to make a reasonable amount of profit. If you can afford, you can even trade through a bank account that needs more capital, because banks usually don’t offer any leverage: Some More Advantages of Trading Forex through a Bank Account
Nobody knows how long it takes to pass the first 3 stages and reach the stage 4. It is different from person to person. However, something which is clear is that nobody can pass these stages without spending enough time and energy. You have to spend time to become a consistently profitable demo and then live trader. You have to practice with peace of mind.
Now, it is time to refer to the beginning of this article that says “People start learning how to trade Forex, because they want to make money…”
Whether you like to make a living through Forex trading or you want to look at it as an investment opportunity to increase your wealth, you have to be financially free while you are trying the master your trading strategy and pass the 4 stages I outlined above.
Financial freedom creates the peace of mind you need to spend enough time on learning and practicing. When you are not financially free and you have to make money as soon as possible, you will not have the peace of mind you need to focus on learning and practicing, and you push yourself to start making money as soon as possible.
Therefore, you will open a live account even before you become a consistently profitable demo trader. Then you will push yourself to make money with your live account. But, as you haven’t completed the learning stages yet, you will make a lot of mistakes, and so, you will lose money.
Most traders wipe out their live accounts at least a few times. Unfortunately, many of them start trading with the money they cannot afford to lose. Finally, they give up after wasting a lot of time and money.
You can’t make money through trading, when you HAVE TO make money. This is one of the big differences that trading has with the other money making opportunities: Trading Strategies Don’t Work If You Don’t Choose the Right Living Strategy
How Does Forex Work Practically?
Therefore, we can say that making money through Forex trading has two main stages:
- Mastering a trading strategy
- Having enough money to trade and invest
According to what I explained above, both of these stages are dependent on “money”. You have to have money to master your trading strategy. Then, you have to have enough money to open a reasonable live account. You can start with a small account, but it takes you a lot of time to turn it into a reasonably big and professional account.
Therefore, having a good and strong source of income is a must. This is how Forex works. It is not only with Forex. It is the same with any trading and investment opportunity, be it currencies, stocks, real estate and…
Forex Trading as a Full Time Job to Make a Living With
Forex or stock trading can’t be known as full time jobs that you can make a living with. They are good and strong investment and money making opportunities, but you shouldn’t look at them as full time jobs. The first and the most important reason is that making money through trading is not just dependent on you, your abilities and activities as the trader. It depends on the markets too.
Sometimes the markets become too slow for several months, and so, you can’t locate a trade setup to make money. Sometimes the markets become too volatile and cause some big losses. You need to have a good and strong source of income and a reliable backup to support your trading venture, otherwise you will be in trouble.
While Forex trading is a great opportunity to make a fortune, it is not a business that you can make a living with in long term. It is the same with stock trading and real estate investment. They can help you increase your wealth and grow your capital dramatically. But it is too hard to rely on them as the main sources of income under the normal conditions.
It is great that you are after making money through Forex trading. But you should consider the facts I explained above to avoid wasting any time and money. As I explained above, having a good and strong source of income is a must for those who want to learn to make money through Forex trading, and also for those who have already mastered their trading strategies.
That is why we not only teach our followers the trading techniques, but also help them to establish a good and strong source of income. This is how Forex works.