Even though our initial response to this question, “Do forex profits exist?” would be an unequivocal “no,” it is vital for us to modify that remark. You could get rich by trading foreign currencies, but only if you are a venture capitalist with a lot of money or a very good currency trader. But for the average retail trader, forex trading is more likely to be a hard way to make money that leads to big losses and maybe even poverty than an easy way to make money. Visit multibank group
The forex market accessed is frequently utilised by retail traders who are interested in making quick profits. According to the statistics, most people who try their hand at trading foreign exchange are unsuccessful, and some of them even end up losing significant sums of money.
Leverage can help you make huge profits, but if you don’t use it wisely, it can also cause you to lose a lot of money. Foreign exchange traders-to-be facingseveral problems, such as risks with counterparties, platform bugs, and sudden jumps in volatility. Foreign exchange pairings are traded in the over-the-counter market rather than on exchanges like stocks and futures, and there is no central clearing firm involved.
- Unanticipated Occurrences
Forex traders face a variety of risks, not all of which are related to unexpected one-time events. Here are seven more reasons why the odds are against a retail trader who wants to get rich by trading on the foreign exchange market.
- Excess Leverage
Although currency values can be highly unpredictable, wild swings are not nearly as often as you might think. On the other hand, the value of stocks can easily rise or fall by more than 20% in a single trading day. But one of the things that makes foreign exchange trading appealing is that forex brokerages offer very high leverage, which can make gains (or losses) bigger.
If a trader sold $5,000 worth of euros short against the US dollar at 1.20 and subsequently covered the short position at 1.10, the trader would have made a nice profit of $500, which is 8.33% of the initial investment. If the trader had used the most leverage allowed in the US, which is 50:1, the profit would have been $25,000 (not counting trading fees and costs). This represents a profit of 416.67%.
Naturally, the potential loss would have been $25,000 if the trader had bought euros at 1.20, employed leverage of 50:1, and then sold euros at 1.10. This would have resulted in a loss. In some countries outside of the United States, leverage can go as high as 200:1 or even higher. In retail foreign exchange trading, the single most important risk element is high leverage, hence, regulators in several countries are cracking down on it.
- Unbalanced Proportion of Risk to Reward
Forex traders with experience limit their losses to a manageable level and compensate for these losses with sizeable profits once their currency prediction is validated. However, most retail traders do it the other way around, making modest profits on several positions but then continuing to hold on to a losing trade for an excessive amount of time, which results in a significant loss. This can lead to a loss that is greater than the value of your upfront investment.
- Problems with the Platform or the System
Think about the situation you would be in if you had a big position but couldn’t close a trade because the platform or system didn’t work right. This problem or failure could be due to a lack of power, too much Internet traffic, or a computer crash. In this group, there would also be times when the market is very unstable and orders like stop-loss would not work. But these didn’t work because there wasn’t enough money on the market, and everyone was trying to close their short franc bets at the same time.
- Lack of an Informational Advantage
Retail traders can’t get access to certain kinds of information, like commercial forex flows and secret government actions, but the biggest forex trading banks have huge trading operations that are connected to the currency world. This gives these banks an information advantage over retail traders.
- Currency Indifference or Volatility
When there is a lot of currency volatility, traders can quickly run out of money if they use a lot of leverage, which means they can borrow against their capital. These things can happen out of the blue and change the markets before most traders have a chance to respond to what has happened.
- OTC Market
The forex market is an over-the-counter market that differs from the centralized stock market and the futures market in that it is not regulated. This also means that foreign exchange trades are not insured by any kind of clearing body, which can lead to collateral damage if it is not managed properly.
- Misuse of Power in the Market and Other Forms of Fraud
Market manipulators frequently use a technique known as “stop-loss hunting” to get an unfair advantage. These corporations will coordinate decreases or increases in price to where they think retail traders will have set stop-loss orders. When these are triggered by a change in price, the forex position is closed. This can have a domino effect as each stop-loss target is hit, giving the person who moved the market a lot of money.
Does It Pay to Trade Forex?
It’s vital to keep time periods in mind when trading forex, although the rewards can be substantial. Making money quickly, on time scales of days or weeks, is simple. But it’s usually much easier to be profitable over numerous years if you have a lot of cash to leverage and a way to control risk. The forex market is notoriously volatile, and few retail traders manage to stay in the game for more than a few years.
Does Forex Carry a Lot of Danger?
Even though forex trades can only go up or down by a single percentage point, they are nonetheless extremely risky. Many forex traders use high levels of leverage because they need to risk large sums of money to make a decent profit. When people use leverage, they expect that their future profits will be more than enough to cover the interest they must pay on the money they borrowed.
Can you say that trading forex is riskier than trading stocks?
Foreign exchange trading, or Forex trading, is distinct from the way most investors trade stocks. Most stock traders buy stocks and keep them for months or even years. On the other hand, foreign exchange (forex) trading happens every minute, every hour, and every day. Due to leverage, the time frames are substantially shorter, and the effects of price swings are amplified. When compared to the volatility of stocks, a one percent change in a currency pair can feel like quite a shift.
The Bottom Line
You should take certain precautions if you want to try your hand at forex trading anyhow, including limiting your leverage, keeping tight stop-losses, and working with a trustworthy forex brokerage. Although these steps may not be enough to change the odds in your favour, they may at least help you a little.
