A quick glance at the size and scale of the foreign exchange can make for impressive reading, with a daily trading volume of $6.6 trillion and a global market value of $2.409 quadrillion.
Analysing numbers can encourage novice traders to immediately assume that forex trading will make them rich, while we’ve all seen historic examples of currency investors who have earned millions from relatively simple market moves.
However, the answer to the question “can forex make me rich?” is a deceptively complex one, as there are many things to keep in mind as an aspiring trader. Here’s a little insight to help you arrive at a genuinely informed conclusion.
The Forex Market in Numbers
If you were to ask most economists whether forex trading could make you rich, the instinctive answer would probably be an unequivocal “no”.
According to the market’s statistics, this may well be the case even in instances where you ask traders.
In November, 2014, a Bloomberg article that analysed the reports of clients at Gain Capital Holdings Inc. and FXCM (the two biggest forex brokers of the time) found that 68% of investors recorded net losses from currency trading over a 12-month period, with this including both retail and institutional investors.
This is in line with the typical assertion that around 70% of forex traders operate at a loss, while historically this number has been estimated at around the 90% mark.
The biggest challenge here is the double-edged sword of leverage, which refers to the process of taking on debt (margin) in order to open and control currency positions that are far larger than your initial deposit.
Usually expressed as a ratio, reputable brokers can offer leverage of up to 100:1 in some instances, making it possible to pursue lucrative and disproportionate gains with as little as £100.
However, such leverage can also lead to outsized profits and substantial losses, so a poorly judged trade or the failure to utilise tools such as stop-losses can dramatically undermine your position in a matter of moments.
This risk is only compounded by the inherently volatile nature of the forex market, while the fact that major currencies like the US dollar are highly liquid also means that such assets are easy to buy and sell in real-time.
So, Can Forex Trading Actually Make You Rich?
At this stage, you may well be ready to close your online trading account and seek solace in less volatile assets such as stocks and indices.
However, the fact that approximately 70% of forex traders record losses doesn’t necessarily mean that this practice can’t be highly profitable, as there’s nothing to say that the remaining 30% don’t bank huge profits during each financial year.
The problem here is the description of the average wealthy trader, who’s likely to be an institutional trader or hedge fund manager with considerable investment experience and huge financial resources.
Of course, there are exceptions to this rule, but the fact remains that vast forex profits largely remain exclusive to the traders who operate at the higher end of the marketplace.
There’s a good reason for this too; and this lies in the need to strike a balance between risk and reward as an ordinary trader.
More specifically, retail traders are encouraged to manage their leverage when starting out, which in turn minimises the size of their positions and ability to bank large-scale returns. This requires investors to execute a higher volume of orders in a bid to boost their profitability, but this is only really suitable for scalpers or day-traders.
You must also cap your leverage in terms of the amount that you can afford to lose, but this is likely to be relatively small unless you have a huge amount of capital at your disposal.
Another factor is your definition of ‘rich’, as this word will mean different things depending on your circumstances. Ultimately, it’s far better to seek out smaller profits rather than obsessing about becoming rich, as the former objective is far more achievable in the forex market.
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