This is a question that I see being asked way too often. Most frequently, it comes from someone looking for a simple, fast, and surefire way to become very wealthy quickly. As if there were such a thing as that we would all be doing it, I probably would not have this blog and you would not be reading it.
It’s not quite so easy to respond to the question of whether trading in FX may make you wealthy with a simple “Yes” or “No.” Foreign exchange trading can, of course, be profitable, especially if you’re a hedge fund with access to significant cash sources. The fact is a different tale for the typical retail forex trader. Contrary to what many regular traders would want to believe, forex trading is a much riskier, more challenging, and more complex industry.
Why Are Some Forex Traders Rich?
The truth is that they’re not—at least not most 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 necessarily make a lot of money from trading foreign exchange. Furthermore, profits are not coming in thick and quick.
Forex Retail Traders
Those that trade forex on behalf of an individual or personal account rather than an institution or organization are known as retail forex traders.
Retail forex traders are usually the ones searching for a quick way to pull off a significant profit, which is why it’s fairly logical that they turn to forex trading.
While forex trading has the potential to make you wealthy in principle, there are significant hazards that must be recognized and taken into account. especially if you have a tight budget.
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 a considerable exposure.
The stock market’s volatility and the foreign exchange market’s volatility are both starkly evident when you compare the two. 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 FX 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.
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 complete 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.
Because they hang on to losing positions for too long, many retail forex traders are unable to become wealthy through trading. You wonder why someone would cling to a defeat. To paraphrase a phrase from the movie The Queen of Hearts – Losing is never easy, but sometimes it is impossible. 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 institutions find it far simpler to do this.
Institutional traders are pitted against retail forex dealers, though not always in a negative way. These enormous banks frequently implement strict and extremely sophisticated trading systems to provide them 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. The chance of suffering a loss is only increased by this knowledge that is asymmetric. It would be similar to playing monopoly against someone who knows what the next roll of the dice will be, to use a rough and imprecise comparison.
Trading Forex Online
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 particularly susceptible to this risk since OTC forex trading lacks institutional assurances.
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 result 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 FX trader.
Get Rich Quick Schemes
Why then are forex traders wealthy? Alternatively, why are certain traders wealthy?
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.
Profitable forex trading is possible, but timelines must be taken into account. In the short term, which is defined as when measured in days or weeks, it is simple to be profitable. However, it’s typically far simpler to be profitable over several years when you have a lot of cash to leverage and a strategy in place to control risk. Many retail traders fail to make it through the first few months or years of FX trading.
I would not go into forex trading looking to get rich quick. It can take many years of study and practice to become a successful trader. You can always start by opening a demo forex account to practice trading online risk-free. You won’t get rich overnight, but you can prevent yourself from making unnecessary losses via silly mistakes from inexperience.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.