If you are an exceptionally adept currency trader or a hedge fund with huge pockets, forex trading might make you rich. 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.
KEY LESSONS
In search of quick returns, many retail traders flock to the forex market.
According to statistics, the majority of ambitious forex traders fail, and some even incur significant financial losses.
Leverage is a two-edged sword since it can result in both astronomical gains and significant losses.
To potential forex traders, platform issues, counterparty concerns, and abrupt spikes in volatility all present difficulties.
Forex pair trading occurs in the over-the-counter market without a central clearing company, in contrast to the exchanges where equities and futures are traded.
How Do Forex Traders Get Rich?
The truth is that they're not—at least not most of them. According to statistics, more than two-thirds of traders record net losses from trading foreign currencies.
Even individuals who are outside of this 66% or so are not always becoming rich through forex trading. Furthermore, profits are not coming in thick and quick.
Forex retail traders
A retail forex trader is a person who makes transactions in the forex market on their own behalf, as opposed to acting on behalf of a company or organization.
Retail forex traders frequently seek out quick opportunities to make significant profits, so it makes sense that they would turn to forex trading.
While forex trading has the potential to make you rich in principle, there are significant hazards that must be recognized and taken into account, especially if you have a tight budget.
Leverage
In forex trading, leverage increases both the possible benefits from a trade's profits as well as the trade's corresponding losses.
Due to the nature of leverage, there is a strong draw to maximizing profits, but there is also a great potential for significant losses.
High risk equates to high gain. Due to high leverage, the majority of forex traders lose money, and some even lose significant sums of money.
The problem of excessive leverage has grown to the point where several regulators around the world see the need to tighten trading regulations. When trading forex, there is still considerable exposure.
Market volatility
The volatility of currency values is brought into sharp relief when you contrast the stock market with the foreign exchange market.
Events that occur suddenly, unexpectedly, or without warning can roil the market and significantly alter currency exchange rates. While other markets are also subject to unforeseen shifts, the forex market is particularly susceptible to them.
Due to this, it is extremely challenging to respond to changes in time. Institutions are better prepared for these types of incidents, but we'll get to that in a minute.
Trading program or platform
Making the proper decisions while trading and knowing when to buy and sell is one thing, but even if your decisions are perfect, whether you're trading long or short, your potential for profit is still constrained by the trading platform you have access to.
Unfortunately, system glitches and failures can occur occasionally among forex traders. If you can't finish a deal, you can't cash in when 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 market can prevent even traders with stop-losses, which are intended to limit the amount lost by automatically selling when the price drops to a predetermined point.
Keeping Losses in Mind
Because they hang on to losing positions for too long, many retail forex traders are unable to get rich through trading. You wonder why someone would cling to defeat.
Frequently, traders make mistakes and cling to failing trades for too long out of a desire to avoid even a slight loss. Naturally, this leads to a greater loss, which is frequently more than the initial investment.
The reverse is how huge, seasoned traders operate: they always look for opportunities to make up for tiny losses with sizable returns. However, it should be highlighted that huge financial institution find it far simpler to do this.
Trader Asymmetry Information
Institutional traders are pitted against retail forex traders, though not always in a negative way. These enormous banks frequently implement strict and extremely sophisticated trading systems to provide them with a competitive edge when it comes to knowledge about global currencies.
Frequently, a typical retail trader does not have access to this information or its sources. This asymmetric knowledge only increases the chance of suffering a loss. It would be similar to playing poker against someone who knows what the next cards will be, to use a rough and imprecise comparison.
Trading using the Internet
The fact that forex trading takes place "over the counter" is another distinction between stock exchanges and the foreign exchange market. 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 particularly susceptible to this risk since OTC forex trading lacks institutional assurances.
Coercion and fraudulent trading
However uncommon they may be, shady dealings, fraud, and manipulation have all been known to happen. Most fraudulent transactions and misdirected or missing investor cash are likely the results of bad actors.
But even large, well-known institutions have been accused of manipulating currency rates artificially and punished as a result. This additional risk in a decentralized and uncontrolled market can be disastrous financially for a lone trader or small forex trader.
Get Quick Poor Solutions
Probably because they didn't enter the forex market hoping to strike it rich or make quick money. Successful retail forex traders are likely to understand how to employ tried-and-true brokerage firms, ensure quick and easy transactions (including stop-losses), and restrict their use of leverage.
We encourage you to contact Global Prime's trading professionals if you're curious to learn more about how forex trading can and cannot make you rich. More details regarding our forex services are available here as well.
The conclusion
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. Despite the fact that the chances are still stacked against you, at least these steps might assist you in somewhat leveling the playing field.