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Can Forex Trading Make You Rich?
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Can you get rich through forex trading? We should clarify our answer even though our first instinct would be to say "No" without any hesitation. If you are an exceptionally good currency trader or a hedge fund with huge pockets, forex trading might become you wealthy. However, for the typical retail trader, forex trading can be a difficult path to massive losses and potential destitution rather than an easy path to riches.
Why Are Forex Traders Rich?
The reality is that they're not—at least not the majority of them. According to statistics, more than two-thirds of dealers who trade foreign currencies record net losses. Even the remaining 66% or so do not always make a lot of money from trading foreign exchange. Furthermore, profits are not coming in thick and quick.
Explore a reasonably recent instance to have a greater understanding of the risk involved in forex trading. As per Investopedia - The Swiss National Bank ended the three-year-old ceiling of 1.20 for the Swiss franc to the euro on January 15, 2015. The Swiss franc increased by as much as 41% against the euro as a result on that day.
Numerous players in forex trading, from small individual investors to huge banks, suffered losses totalling hundreds of millions of dollars as a result of the central bank of Switzerland's unexpected action. At least three brokerages had their capital destroyed by losses in retail trading accounts, making them insolvent. FXCM, the biggest retail forex brokerage in the United States at the time, was also on the verge of going out of business.
The danger that forex traders face is not limited to unforeseen one-time occurrences.
Here are seven more factors that work against ordinary traders who wish to make money on the FX market.
While currencies can be erratic, ferocious swings such as the one experienced by the Swiss franc are uncommon. For instance, a significant adjustment that reduces the euro's value relative to the dollar from 1.20 to 1.10 over a week is still less than 10%. Conversely, stocks can readily fluctuate by 20% more than in one day. But the large leverage offered by forex brokers, which could increase profits, is what makes forex trading so alluring (and losses).
If an investor sells short $5,000 worth of euros at 1.20 and then buys them back at 1.10, they will have made a good return of $500, or 8.33%. The return would be $25,000, or 416.67% if the trader employed the highest leverage of 50:1 allowed in the United States (adding trading fees and commissions are not included).
In fact, the possible damage would have been $25,000 had the trader been long the euro at 1.20, utilized 50:1 leverage, and closed the position at 1.10. Leverage in some foreign countries can reach 200:1 or more. Authorities are cracking down on high leverage since it is the one greatest risk concern in retail FX trading.
2. Trading System/Platform
Having the proper decisions while trading and understanding whenever to purchase and sell is one thing, however even if your decisions are perfect, whether you're trading long or short, your potential for profitability is still constrained by the trading system you have access to.
However, system glitches and failures can occur occasionally among forex traders. If you can't finish a deal, you can't cash in whenever the time is perfect, whether this is because of system overload, a power outage, or a single computer failing. If a transaction doesn't completed in a timely manner, even minor delays could prove expensive.
The severity and speed of the volatility in the forex marketplace can prevent even traders with stop-losses, which are intended to reduce the amount lost by immediately selling when the price goes down to a predetermined point.
3. Holding on to Losses
Because they hang on to losing positions for too long, most retail forex traders are unable to become wealthy via trading. You wonder why someone would cling to a defeat. Frequently, traders make mistakes and cling to failing trades for too long out of a wish to prevent even a slight loss. Naturally, this leads to a greater loss, which is frequently more than the original cost.
The reverse is how huge, seasoned traders function: they always look for opportunities to make up for tiny losses with sizable returns. However, it must be highlighted that huge financial institutions find it far simpler to do this.
4. Volatility of currencies
Remember the Swiss franc illustration. Due to high levels of leverage, trading investment can be swiftly exhausted throughout times of extraordinary currency volatility. These occurrences can happen quickly and affect the marketplace before the majority of single traders have a chance to respond.
5. No Edge Information
The largest forex trading institutions have sizable trading activities that are integrated into the currency market and have access to data that retail traders do not (for instance, commercial forex flows and covert government involvement).
6. Over-The-Counter Trading
The fact that forex trading takes place "over the counter" distinguishes forex markets from stock exchanges. Since these trades are neither centralized nor controlled, there is a higher chance that one party will back out of the deal. Counterparty risk is the term for this. Small retail traders are especially susceptible to this risk since over-the-counter forex trading lacks institutional assurances.
7. Fraud and Market Manipulation
The forex industry has occasionally seen fraudulent activity, including Secure Investment, which vanished in 2014 with more than $1 billion in investor assets.
There has also been widespread market manipulation of FX rates, which has included a number of major companies. For instance, in May 2015, five significant banks together paid fines totalling about $9 billion for trying to influence exchange rates between 2007 and 2013.
Stop-loss-seeking is a frequent tactic used by marketplace players to influence the markets. These big companies will plan price changes in accordance with where they believe retail traders will have placed their stop-loss tickets. The forex position is sold when these are activated immediately by price action. This might result in a waterfall impact of selling once every stop-loss level is activated, which can result in significant returns for the market player.
If you decide to continue trading forex, it would be wise to take a few precautions: restrict your leverage, maintain tight stop-losses, and work with a trustworthy forex brokerage. Even though the chances are still stacked towards you, at least these steps might assist you in somewhat levelling the playing field. Hopefully, this blog helps you well to understand can FX trading make you rich.
Frequently Asked Questions
(1) Who made money trading forex?
George Soros is the trader who holds the title of "richest forex trader in the world." His short position on the pound earned him almost $1 billion and caused the Black Wednesday event, making him famous for "breaking the Bank of England" in 1992. The current estimate of George Soros' net worth is $8 billion or more.
(2) Why do many forex traders lose money?
Because their capitalization levels fall short of the size of the trades they execute, many forex traders lose money. Forex traders are forced to take on such a significant and fragile financial risk either because of greed or the possibility of controlling enormous sums of money with only a little quantity of capital.
(3) Is Forex Trading Profitable?
Profitable forex trading is possible, but timelines must be taken into account. In the short term, which is defined as when evaluated in days or weeks, it is simple to be successful. Therefore, it's typically far simpler to be profitable over several years when you possess a lot of cash to leverage and a strategy in place to control risk. Most retail traders fail to make it through the first few months or years of FX trading.
(4) Forex: Is It High Risk?
Forex trades are extremely high risk even if they can only be made in percentages of one point. Since a big investment is required to make a considerable profit in forex, many traders use high levels of leverage. Although it is hoped that their use of leverage will yield a return, leveraged positions typically cause losses to grow significantly.
(5) How can I become wealthy fast?
Here is a list of some of the top fast-track routes to (relative) wealth.
1. Avoid debt (and pay it off).
2. Spend with Intention and Cut Costs.
3. Put as much money as you can into a diversified portfolio.
4. Develop Your Career.
5. Work more hours.
(5) Are stocks riskier than forex?
Compared to how most individuals trade equities, forex trading involves a distinct trading approach. While most stock traders buy and hold their investments for months or even years, forex traders trade by the minute, hour, and day. Because of leverage, the periods are substantially shorter and price changes have a more noticeable impact. A change of 1% in stock is not much, but a change of 1% in a currency pair is significant.