Can trading forex make you wealthy? The plain answer is no, but we should probably justify this response. Forex trading can make you rich if you deal with deep-pocketed hedge funds or you are incredibly brilliant in trading stocks.
Otherwise, for the average forex trader, rather than being the bridge towards fulfilling wealth, trading forex can be frustrating and lead to potentially massive losses. This is because many traders turn to forex for quick cash without performing due diligence on the market.
A study done by Bloomberg in 2014 based on FXCM Inc. and Gain Capital Inc. showed that these two companies reported losses to their clients to a tune of 68% of the entire portfolio for the previous year.
Some scholars can deduce this as one in three merchants makes profit when trading securities. However, this is not the same as having a certain path to wealth from trading securities. This review will look at what makes forex trading not a certain profit venture and plenty more.
What Makes Forex Trading a Risky Venture?
Disproportionate Risk to Return
Merchants experienced in trading maintain their losses in the lower percentile and then offset these losses with massive profits when their trades are indeed accurate.
Most average traders do it vice versa, whereby they make small gains in several positions but then maintain a crumbling trade for too long, thereby suffering a considerable loss. Also, the loss sustained here could be more than the primary investment.
Too Much Leverage
Although trading currencies can be fickle, vicious gyrations in currencies such as the Swiss franc are by no means common. For instance, a massive leap that moves the Euro from 1.2 to 1.3 against the Dollar still precipitates a variation of less than 10%.
On the other hand, securities can quickly move up or down by over 20% in just 24 hours. However, what appeals to people most with regard to forex trading is the massive leverage afforded by brokerage firms which can amplify both profits and losses.
A merchant who shorts 5,000 Dollars in Euros against the Dollar at a rate of 120% and then shields the short position at 110% will make a clean margin of 8.3%. If the trader used the max leverage allowed in the US, 50:1, the profit would be 416.67%.
However, if the merchant had used the 50:1 leverage, failed to short the euro position at 120%, and then withdrawn the trade at 110%, the impending loss would have been 416.67%. Some countries allow leverage to be as much as 150:1 or even more.
Too much leverage is the single most significant risk element in forex trading; therefore, securities watchdogs in various countries are closing down on it.
Picture the trouble you would be in if you take a significant position and are incapable of concluding a trade due to structure breakdown. This could be a result of machines crashing, power blackout, internet overload, among other things.
Structure breakdown also incorporates remarkably unpredictable times when remits such as stop-losses cease to function.
Which Market Indicators Should Aspiring Traders Be Conversant with?
No Information Upper hand
The largest currency exchange financial institutions have vast trading processes plowed into the money realm and have an information upper hand, such as clandestine government interference, which is not accessible to average forex traders.
Massive grades of leverage imply that exchanging resources can be exhausted very rapidly during episodes of uncommon currency instability. These proceedings can arise abruptly and move the markets before the average traders can counter.
OTC (Over The Counter) Market
Forex is an OTC market that is not integrated and controlled like stocks. This implies that forex exchanges are not assured by any clearing firm, resulting in counterparty risk.
Market Manipulation and Racketeering
There have been sporadic instances of racketeering in the forex industry—for instance, the Secure investment case in 2014 where over 1 billion dollars of investor capital vanished.
Also, manipulation of forex proportions has been rampant. In 2015, for instance, five big financial institutions were fined close to 6 billion dollars for trying to influence trade proportions between 2007 and 2013.
To sum it all up, if you still want to give forex trading a go, it would be wise if you employ some safety measures. Although the odds are not in your favor having safety measures in place could help you avert the risk of massive losses.