There are some people who join the forex brokers in South Africa to become rich. Is it possible for trading in fore to make you rich? It is possible to become rich through forex trading if you happen to have a hedge fund with pockets which are deep or be a skilled currency trader who is exceptional. But if you are just an average trader on forex, rather than forex being a roadmap to richness, it might be a highway which is rocky to potential penury and enormous losses.
According to a survey carried out in November 2014 by Bloomberg, it was noted that, using data collected from their biggest forex companies at that time; the FXCM Inc. and the Gain capital holdings Inc. – GCAP, about 68% of those who invested in the companies had net losses from having to trade in currencies in the previous years. While this might be interpreted as one in every three trader’s not losing money in currencies trading that might not be the same as becoming rich from trading with the forex.
You have to remember that, the numbers of Bloomberg were cited two months before the Seismic that was unexpected, shocking in the markets of currency that highlighted the forex trading risk. In 2015 January 15, it was the turn of the Swiss National Bank abandoning the Swiss Franc’s cap of the 1.20 which was against the euro which had in place for the last three years. Because of that, the Swiss franc was able to soar to 41% against the euro on that particular day.
The move from the Switzerland central bank which was a surprise one did inflict a lot of losses that ran into millions of dollars on participants who were in the trading of forex from the small scale investors to the larger banks. The losses that happened in the trading accounts of retailers wiped the entire capital of the three brokerages, making them to become insolvent and took the FXCM, which was the largest forex brokerage by then in the USA to almost bankruptcy.
One time unexpected events are not the single most risk that faces the forex traders. The following are other risks why the odds might be stack with you as a retail trader that wants to get rich while trading on the forex market.
Leverage that is excessive
Even though the currencies might be volatile, there are violent gyrations like the aforementioned of the Swiss franc which are not very common. A move that is substantial for example which takes the euro from 1.20 to about 1.10 versus the dollar of the USA over a week is still a change that is less than 10%.
Alternatively, stocks can be traded up easily or down 20% or even more on a particular day. But when it comes to the forex trading allure, it lies in the large leverage which is provided by the forex brokerages, which might end up magnifying gains as well as losses.
A trader with 5000$ shorts that are worth euros against the dollar of the USA at 1.20 and then being able to cover the short position at about 1.10 might end up with a profit of $500 or in percentage, 8.33%. If the trader was able to use the maximum leverage of 50:1 which is accepted in the US, while ignoring the trade commissions and costs, the profit will be $25000 or 416.67%.
If the trader had been long at the euro at 1.20, used the 50:1 leverage, and then ended up to exit the trade at 1.10, the probable loss might have been $25000. In some instances of overseas jurisdiction, the leverage might be as much as about 200:1 or even more. because of the leverage which is high, it makes it to be a risk factor which is great in the trading of retail forex, regulator in several nations are trying to clamp down on it.
Asymmetric risk to the reward
Forex traders who are seasoned do ensure that their losses are at a low and offset them with gains which are sizeable whenever their currency is able to call proves to be right. Majority of the retail traders, end up doing it the other way, making profits that are small on various positions but then holding on the a trade of lose for quite a long time and thereby, incurring a loss which is quite substantial. It might also result in being able to lose more than what you invested initially.
System or platform malfunction
Try imagining your plight if you were to have a bigger position and are not able to close trade due to the platform malfunctioning or the system failing which might be anything from an outage of power to an overload on the internet or the computer crashing.
It is a category which also includes some volatile times that are exceptional when orders like stop losses don’t work. For example, there were many traders who have tight stop losses in place on their short Swiss franc position before the currency was able to surge in January 15, 2015. But it proved infective as the liquidity was able to dry up even as everyone tried to stampede to close their positions of short francs.
Types of indicator which a forex trader has to know
No edge information
The main forex trading banks have got trading operations which are massive which they are plugged into the world of currency and have information edge which is not available for the retail traders such as the covet government intervention and the commercial forex flow.
Volatility of currency
If you can recall the example of the Swiss franc, high leverage degrees denote that the capital for trading might be depleted very fast during such periods of currency volatility that is unusual. The events can come quite suddenly and then end up moving the markets before majority of the individual traders have an opportunity of reacting.
