Can You become rich by trading forex

Can forex trading lead to financial success? This is not a yes or no question. If you are an experienced currency trader with years of market expertise or an investment fund with significant resources, then trading may potentially turn out to be lucrative for you. For a normal retail trader on the other hand, trading foreign exchange can be a daunting path that may lead to significant losses.

Unpredictable trading forex market events

Let’s examine an example to become more familiar with the risks involved when trading forex. The National Bank of Switzerland removed the 1.20 limit on the CHF versus the EUR on January 15, 2015, after implementing it for 3 years. Therefore, the CHF rose by 41% versus the EUR.

Various market participants, from individual traders to major banks, experienced huge losses because of the Swiss National Bank’s unexpected move that totalled several hundred million. These losses in the trading accounts forced 3 brokerages into bankruptcy as their capital was decimated. Back then, one of the biggest forex brokers in the U.S. was also close to bankruptcy as well.

Using more leverage than needed

There might be wide variations in currency swings. But not everyone is like the CHF case. Throughout a week following a market movement, the EUR/USD exchange rate, for instance, might drop from 1.20 – 1.10 against the USD. This movement is still less than 10%. However, the value of stocks can easily fluctuate by 20% either way in a single day.

Forex brokers usually provide a significant amount of leverage which is what attracts many traders to the forex market. Nevertheless, forex leverage may generate profits but lead to losses as well.

Disruption of the Platform or the System

Imagine you have a big position but cannot close a trade because of a platform or system malfunction. This problem can be anything from a power outage to an Internet connection problem or a computer crash.

Periods of extreme volatility when stop-loss orders fail are also included in this category. Going back to the Swiss franc example, before this, many traders had strong stop-loss orders in place regarding their CHF positions before the currency’s surgeon on January 15, 2015. Nevertheless, these were ineffective since liquidity dried up, despite everyone’s urge to close these positions.

More facts about the Forex market

Lack of access to information

Large forex trading institutions like banks have massive trading operations that are integrated into the foreign exchange market and have access to information that retail traders do not, like commercial forex movements and secret government involvement.

Currency volatility

As already discussed, because of high levels of leverage, trading capital can very quickly be reduced during times of extreme currency volatility. Such events happen in the blink of an eye and can impact the markets before even traders get the opportunity to react.

Over-the-counter (OTC) the market

Unlike the stock and futures markets, which are decentralised and regulated, the FX market is an over-the-counter market, meaning that there is no central location but rather participants from all around the globe trade electronically via computer networks. This also implies that there is no clearing body of any kind that can guarantee currency trades, which might result in counterparty risk.

Market manipulation & fraud

The forex industry has sometimes experienced incidents of fraud, like the Secure Investment, which vanished with more than $1 billion in investor funds in 2014.

FX rates have also been widely manipulated in the market, with some of the biggest businesses participating. For instance, five important banks paid fines totalling over $9 billion in May 2015 for trying to manipulate exchange rates between 2007-2013.

Market movers regularly employ the “stop-loss hunting” strategy to control the markets. Based on where they anticipate retail traders will have placed their stop-loss orders, the major players will plan price movements. The forex position is sold when they are triggered automatically by price movement, which might result in a waterfall effect of selling when each stop-loss mark is reached.

Can forex be profitable?

One can potentially profit from forex trading if timelines are taken into account. For example, it is easier to be profitable if you are a short-term trader, that is when your trading timeline is for some days or weeks.

However, to generate longer-term profits, it is usually preferable that you have a lot of capital to leverage and have a risk-management strategy in place. Many retail traders can’t make it through the first months of trading forex.

Trading Forex vs stocks

Forex trading requires a different technique compared to that of stock trading. While most stock traders buy and keep their investments for months or years, forex traders trade by the minute, hour or day. Because of leverage, timelines are shorter and the impact of price changes is more noticeable. A change of 1% in a stock is not much, but a change of 1% in a currency pair is significant.

Final thoughts

Trading currencies could potentially lead to financial success. But it won’t happen overnight. A retail trader may need several years to turn their first trading account into a large one. The possibility of losing exists at all times.

Additionally, one of the reasons why the majority of new traders find it hard to trade forex successfully is the misuse of leverage. As a result, a forex trader who is well-equipped to reflect and fix trading errors, maintains discipline, shows patience and uses acceptable leverage may potentially generate revenue by trading in the forex market over a period based on the initial capital.

If you stick with forex trading, it would be wise to take a few actions: limit your leverage, maintain tight stop-losses, and work with a trustworthy forex brokerage.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.