Forex trading could make you rich if you are a very good trader or if you work for a hedge fund with a lot of currency. But for the average retail trader, forex trading is more likely to be a hard way to lose a lot of money and end up broke than an easy way to get rich.
KEY LESSONS
- Many retail traders go to the forex market in search of quick profits.
- Statistics show that most people who want to trade in the forex market fail, and some even lose a lot of money.
- Leverage is like a double-edged sword because it can lead to both huge gains and big losses.
- Possible forex traders face problems with the platform, their counterparties, and sudden jumps in volatility.
- Forex pair trading takes place on the over-the-counter market, which doesn't have a central clearing company like stock and futures exchanges.
How Do Forex Traders Get Rich?
The truth is that most of them are not like that. Statistics show that more than two-thirds of traders make net losses when trading foreign currencies.
Even people who aren't in this group, of about 66%, don't always get rich through forex trading. Also, they aren't making a lot of money right away.
Retail traders in the Forex
A retail forex trader is someone who trades on the forex market on their own behalf rather than for a business or organization.
Retail forex traders often want to make a lot of money quickly, so it makes sense that they would turn to forex trading.
Forex trading has the potential to make you rich, but there are a lot of risks that you need to be aware of and plan for, especially if you are on a tight budget.
Leverage
In forex trading, leverage increases both the possible profits and losses from trade.
Because of how leverage works, there is a strong desire to make the most money possible, but there is also a big chance of losing a lot of money.
High risk means high reward. Because the leverage is so high, most forex traders lose money, and some lose a lot of money.
The problem of too much leverage has gotten so bad that regulators all over the world think they need to make trading rules stricter.
Even when trading forex, there is still a lot of risks.
Market volatility
When you compare the stock market and the foreign exchange market, you can see how volatile currency values are. When things happen quickly, unexpectedly, or without warning, they can shake up the market and change the exchange rates of currencies in a big way.
Even though changes can happen in other markets as well, they happen more often in the forex market.
Because of this, it is very hard to respond to changes at the right time. Institutions are better prepared for these kinds of events, but we'll talk about that in a minute.
A program or platform for trading
Making the right decisions when trading and knowing when to buy and sell is one thing, but even if you make the best decisions, your profit potential is still limited by the trading platform you have access to, whether you're trading long or short.
Forex traders sometimes have problems with their systems and have to start over. If you can't finish a deal, you can't cash in when the time is right, even if it's because the system is too busy, the power went out, or just one computer broke. If a transaction isn't finished on time, even small delays could end up costing a lot.
Even traders with stop-losses, which are meant to limit the amount lost by selling automatically when the price drops to a certain point, can't keep up with the volatility of the forex market.
Keeping Losses in Mind
Many retail forex traders can't get rich through trading because they hold on to losing positions for too long. You can't understand why someone would want to keep losing.
Traders often make mistakes and hold on to bad trades for too long because they want to avoid even a small loss. Of course, this means a bigger loss, which is often bigger than the initial investment.
Big, experienced traders do things the opposite way: they always look for ways to make up for small losses with big gains. But it should be noted that this is much easier for large financial institutions.
Trader asymmetry Information
Retail forex traders face off against institutional traders, but not always in a bad way. These huge banks often use strict and very complicated trading systems to give them an edge when it comes to knowing about global currencies.
A typical retail trader often doesn't have access to this information or its sources. This difference in information only makes it more likely that someone will lose. In a rough and imprecise way, it would be like playing poker against someone who knows what the next card will be.
Buying and trading on the Internet
Another difference between stock exchanges and the foreign exchange market is that forex trading happens "over the counter." Since these trades are not centralized or controlled, there is a higher chance that one party will back out of the deal.
This is called "counterparty risk." Since there are no institutional guarantees in OTC forex trading, this risk is especially high for small retail traders.
Coercion and trading in a fraudulent way
Even though they don't happen very often, shady deals, fraud, and manipulation have happened. Most likely, bad actors are behind most fraudulent transactions and money that goes missing or gets sent in the wrong direction.
But even large, well-known institutions have been accused and punished for manipulating currency rates. For a single trader or a small forex trader, this extra risk in a decentralized and uncontrolled market can be very bad for their finances.
Get Poor Solutions in a Hurry
Most likely because they didn't go into the forex market with the goal of getting rich quickly, successful retail forex traders probably know how to use tried-and-true brokerage firms, make sure transactions are quick and easy (including stop-loss orders), and limit how much leverage they use.
If you want to know more about how forex trading can and can't make you rich, you should talk to the trading experts at Global Prime. You can also find out more about our foreign exchange services here.
The bottom line
If you decide to keep trading forex, you should take a few precautions: limit your leverage, keep your stop-loss orders tight, and work with a reputable forex brokerage. Even though the odds are still against you, these steps might help you even things out a bit.