Although the instinctive response to this question regarding Forex trading will be “no doubt”.
However, we must qualify for this response.
Forex trading can make you rich if you are an unusually skilled currency trader, a hedge fund, or deep pockets.
But for the average retail trader, rather than an easy path to wealth.
Forex trading can become a rocky highway leading to huge losses and a potential deficit.
But first, the stats. A Bloomberg article in November 2014 indicated that based on reports from its clients.
It’s by two of the largest Forex firms of the time – Gain Capital Holdings Inc. (GCAP) and FXCM Inc.
68% of investors had net losses from currency trading in the previous year.
While this can be interpreted as meaning that one out of every three traders does not lose money trading currencies.
However, this is not the same as the richness of foreign exchange trading.
Many retailers turn to the Forex market in search of quick profits.
Statistics indicate that most ambitious Forex traders fail, and some even lose large sums of money.
Leverage is a double-edged sword, as it can lead to large profits but also heavy losses.
Counter party risk, statutory malfunctions, and sudden explosions of volatility are also challenges for potential Forex traders.
Unlike shares and futures that are traded on the stock exchanges.
Foreign currency pairs are traded on the market without a prescription with no central clearing company.
He also notes that Bloomberg figures were cited only two months before an unexpected seismic shock in the currency markets.
Which highlighted the risks of foreign exchange trading.
On January 15, 2015, the Swiss National Bank abandoned the Swiss franc ceiling of 1.20 against the euro it had been in for three years.
As a result, the Swiss franc rose 41% against the euro and 38% against the US dollar that day.
The surprising move by the Swiss central bank caused hundreds of millions of dollars in losses.
This has countless participants in Forex trading, from small individual investors to big banks.
The losses in the retail accounts resulted in the elimination of the capital of at least three brokerage firms, which made them insolvent.
FXCM, then the largest retail foreign exchange broker in the United States, was on the verge of bankruptcy.
Unexpected one-off events are not the only risk Forex traders face.
Here are seven other reasons why the potential is stacked against a retailer who wants to get rich in Forex trading.
Huge leverage within Forex trading
Although currencies can be volatile, violent fluctuations such as the Swiss franc mentioned above are not common.
For example, the fundamental change that takes the euro from 1.20 to 1.10 against the US dollar remains.
This over a week represents a change of less than 10%.
On the other hand, stocks can be easily traded at 20% or more in one day.
But the attractiveness of Forex trading lies in the huge leverage provided by Forex brokerage firms, which can amplify gains (and losses).
The trader who converts 5,000 USD to EUR against the USD at 1.20.
Then covering a short position at 1.10 will make a profitable profit of $ 500 or 8.33%.
If a trader uses the maximum allowable leverage of 50: 1 that is allowed in the United States.
(Ignoring trading and commission costs) the profit is $ 25,000, or 416.67%.