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Can forex trading make you rich?

Can Forex Trading Make You Rich?

Can forex trading make you rich? Although our spontaneous reaction to this question would be an unequivocal “no,” we should always categorize this answer.

Forex trading can make you rich if you are a deep-pocket hedge fund or oddly smart currency trader. Except for the average retail trader, instead of being a simple path to get rich, forex trading can be a bumpy road that leads to huge losses and potential poverty.

Can forex trading make you rich?

  • unexpected events

To better understand the risks of forex trading, consider a relatively recent example. On January 15, 2015, the Swiss National Bank abandoned the Swiss franc ceiling of 1.20 to the euro that had been in place for three years.

As a result, the Swiss franc rose 41% against the euro on that day.

The sudden move by the Swiss Central Bank caused losses estimated at hundreds of millions of dollars to countless participants in forex trading, from small individual investors to large banks. Losses in retail trading accounts have wiped out the capital of at least three brokerages, rendering them insolvent, and pushing FXCM, once the largest retail forex broker in the United States, to the brink of bankruptcy.

One-time unexpected events are not the only risk facing forex traders. Here are seven more reasons why the odds are stacked against a retail trader who wants to get rich trading the forex market.

  • Excessive leverage

Although currencies can be volatile, violent fluctuations such as the Swiss franc mentioned above are not uncommon. For example, the large movement of the euro from 1.20 to 1.10 against the US dollar over the week still represents a change of less than 10%. On the other hand, stocks can easily trade up or down 20% or more in a single day. But the allure of forex trading lies in the huge leverage that forex brokerages provide, which can magnify gains (and losses).

A trader who sells $5,000 worth of EUR/USD at 1.20 and then covers the short position at 1.10 will make a good profit of $500 or 8.33%. If a trader uses the maximum leverage of 50:1 allowed in the US (ignoring trading costs and commissions), the profit is $25,000, or 416.67%.

Of course, had the trader been long on the Euro at 1.20, used a 50:1 leverage, and exited the trade at 1.10, the potential loss would have been $25,000. In some offshore jurisdictions, the leverage can be as high as 200:1 or higher. Since excessive leverage is the biggest risk factor in retail forex trading, regulators in several countries are putting pressure on it.

  • Disproportionate risk reward

Experienced forex traders keep their losses small and compensate them with large gains when the demand for their currency proves to be correct. However, most retail traders do it the other way around, making small profits on several positions but then holding a losing trade for a long time and incurring a big loss. This can also result in you losing more than your initial investment.

  • Basic malfunction of the system or system

Imagine your plight if you had a large position and were unable to close a trade due to a platform malfunction or system failure, which could be anything from a power outage to internet overload or a computer crash. This category will also include exceptionally volatile times when orders such as stop losses are not working. For example, many traders had tight stop-losses on their short CHF positions before the currency rallied on January 15, 2015. However, it proved ineffective as liquidity dried up even as everyone rushed to close CHF short positions.

  • No tip info

The largest forex trading banks have huge trading operations connected to the world of currencies and have an informational advantage (for example, forex trade flows and secret government intervention) not available to the retail trader.

  • currency volatility

Cite the example of the Swiss franc. High degrees of leverage mean that trading capital can be depleted very quickly during periods of unusual currency fluctuations. These events can come on suddenly and move the markets before most individual traders have a chance to react.

  • OTC market

The forex market is a decentralized and unregulated market like the stock or futures markets. This also means that forex trades are not guaranteed by any type of clearing institution, which may lead to counterparty risk.

Fraud and market manipulation

There have been occasional cases of fraud in the forex market, such as the case of safe investing, which disappeared with more than a billion dollars in investor money in 2014.

Market manipulation of foreign exchange rates has spread as well, and it involves some of the biggest players. In May 2015, for example, five major banks were fined nearly $6 billion for attempting to manipulate exchange rates between 2007 and 2013, bringing the total fines imposed on these five banks to nearly $9 billion.

A common way for market engines to manipulate the markets is through a strategy called Find Stop Loss. These large organizations will coordinate the price drop or rise to where they expect retail traders to set their stop-loss orders. When triggered automatically by price action, forex position being sold, it can create a waterfall effect of selling as every stop loss is triggered, and it can bring big profits to the market mover.

Is forex trading profitable?

Forex trading can be profitable but it is important to consider time frames. It's easy to be profitable in the short term, as it is when measured in days or weeks. However, it is usually much easier to make a profit over several years when you have a large amount of money to draw from, and you have a risk management system in place. Not many retail traders survive forex trading for more than a few months or years.

Is forex trading high risk?

Although forex trades are limited to one-pip ratios, they have a very high risk. The amount required to make a big profit in forex is large and therefore many traders enjoy high leverage. The hope is that their leverage will lead to profit but more often than not, leveraged positions increase losses dramatically.

Is forex riskier than stocks?

Forex trading is a different trading style than the way most people trade stocks. The majority of stock traders buy stocks and hold them for years sometimes, while forex trades by the minute, hour, and day. The time frames are much shorter and the price movements have a more pronounced effect due to the leverage. A 1% movement in a stock is not that great, but a 1% movement in a currency pair is rather significant.

  • minimum

If you still want to try your hand at forex trading, it would be wise to use some guarantees: limit your leverage, keep your stop loss, and use a reputable forex brokerage. Although the odds are still stacked against you, at least these measures may help you level the playing field somewhat.

Watch also: Forex Trading: A Beginner's Guide