Can forex trading make you rich? Although our automatic response to this question is a resounding “no,” we must put this answer into perspective. First, of course, forex trading can make you rich, whether you are a well-funded hedge fund or an exceptionally experienced forex trader. But for the average retail trader. Forex interchange may not be an easy road to riches, but rather a rocky road leading to huge losses and potential bottlenecks.
IMPORTANT POINTS TO REMEMBER
Many retail traders turn to the forex market in hunt of quick profits.
Statistics show that most novice forex traders fail and some even lose large sums of cash.
Leverage is a sly sword as it can lead to extra-large gains and significant losses.
Counterparty risks, platform disruptions and sudden spikes in volatility also pose challenges for future forex traders.
Unlike stocks and futures, traded on an exchange, currency pairs trades over the counter without a central clearing house.
Consider a relatively recent example to better understand the dangers of forex trading. On January 15, 2015, the Swiss National Set removed the three-year limit of 1.20 Swiss francs against the Euro.1 As a result, the Swiss franc rose by 41% against the Euro on the day. .two
The Swiss Central Bank’s surprise decision has inflicted hundreds of millions of dollars in losses on countless forex trading participants, from small retail investors to large banks. Losses on retail accounts wiped out the capital of at least three brokers. Bankrupted them and brought FXCM, then the largest foreign exchange brokerage firm in the United States, to bankruptcy.
Excessive Leverage ,Can Forex Trading Make You Rich?
Although currencies can be volatile, wild swings like the Swiss Franc mentioned above are not common. For example, a significant move that takes the Euro from 1.20 to 1.10 against the US dollar for a week is still less than 10% change. On the other hand, stocks can easily rise or fall by 20% or more in a single day. But the appeal of forex trading lies in the tremendous leverage provided by forex brokers, which can magnify profits (and losses).
A trader shorting €5,000 against the US Dollar at 1.20 and then covering the short position at 1.10 would have a net gain of $500 or 8.33%. If the trader uses the maximum leverage allowed in the US of 50:1 (excluding trading fees and commissions), the profit is $25,000 or 416.67%.3
If the trader had been long the Euro at 1.20, used 50:1 leverage, and departed the trade at 1.10, the potential loss would have been $25,000. In some foreign jurisdictions, leverage can be as high as 200:1 or even higher. Since excessive leverage is the biggest risk factor in retail forex trading, regulators in several countries are cracking down on it.
Asymmetric Risk To Reward
Experienced forex traders cut their losses and make up for them with sizeable profits when their currency decision turns out to be right. However, most retail traders do it the other way around, making small profits on multiple positions but then landing on a losing trade for too long and incurring a significant loss. It can also result in a loss greater than your original investment.
Platform Or System Malfunction
Imagine your fate if you hold a large position and cannot close a trade due to a platform malfunction or system failure, ranging from a power outage to an internet overload or computer crash. This category would also include exceptionally volatile periods when orders such as stop losses do not work. For example, many traders had tight stop-loss positions on their short Swiss Franc positions before the currency surged on January 15, 2015. However, these proved ineffective when liquidity dried up, even as all your short positions in Francs rushes to close.
No Edge Information
The largest forex trading banks have massive operations connected to the forex world and have an informational advantage (e.g., forex trading flows and covert government intervention) that is not available to the retail trader.
Consider the example of the Swiss franc. High leverage means trading capital can be depleted very quickly during periods of unusual currency volatility. These events can be sudden and move markets before most individual traders react.
The foreign conversation market is an over-the-counter market that is not centralized or regulated like the stock or futures markets. This also means that FX transactions are not guarantee by any type of clearinghouse, which can result in counterparty risk.4
$6 trillion a day
Although the OTC foreign exchange market is decentralized, it is huge, with data from a three-year 2019 Central Bank foreign exchange survey showing that more than $6 trillion worth of foreign exchange is trade daily.5
Fraud And Market Manipulation
There have been occasional instances of forex market fraud such as Secure Investment, which disappeared in 2014 with over $1 billion in investor funds.6 Market manipulation of foreign exchange rates was also widespread, affecting some of the biggest players. For example, in May 2015, five major banks were fined nearly $6 billion for attempting to manipulate exchange rates between 2007 and 2013.
A common way for market participants to manipulate the markets is to use stop-loss hunting strategy. These large organizations coordinate price dips or rises where they expect retailers to have their stop-loss orders set. When price movements automatically trigger these. The forex position sold and this can result in a cascading sell-off effect as each stop-loss point is triggered. Resulting in huge profits for the market machine.
Is It Profitable To Trade Forex? Can Forex Trading Make You Rich?
Forex trading can be gainful. But it must reflect the time frame. For example it’s easy to be profitable in the short term, measured in days or weeks. However, it’s often much easier to be profitable over multiple years if you have ample cash and a risk management system. Unfortunately, many retail traders don’t survive trading forex for more than a few months or years.
Is Forex High Risk?Can Forex Trading Make You Rich?
Although Forex trading is limited to one point percentages, it is very risky. The amount of money required to make a significant profit in the forex market is substantial and as a result many traders are heavily leverage. The hope is that your leverage will generate profits. But more often than not, leveraged positions amplify losses exponentially.
Is Forex Riskier Than Stocks?
Forex trading is different from the way most people trade stocks. Most stock traders buy stocks and sometimes hold them for years, while forex trading takes minutes, hours and days. The timeframes are much shorter and price movements have a greater impact due to leverage. A 1% move in a stock isn’t much, but a 1% move in a currency pair is significant.
The Essential For Can Forex Trading Make You Rich?
If you still want to try your pointer at forex trading, it would be wise to take some safety precautions: limit your leverage, keep stop-loss tight, and use a reputable forex broker. While the odds are still against him, these measures can help level the playing field, at least to some extent.