Can Forex Trading Make

You Rich?
The Forex Secret

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Answer
Although our instinctive reaction to that question would
be an unequivocal "No,” we should qualify that
response. Forex trading may make you rich if you are
a hedge fund with deep pockets or an unusually skilled
currency trader. But for the average retail trader, rather
than being an easy road to riches, forex trading can be a
rocky highway to enormous losses and potential penury.
Answer Continued
But first, the stats. A Bloomberg article in November 2014 noted that
based on reports to their clients by two of the biggest publicly traded
forex companies – Gain Capital Holdings Inc. (GCAP) and FXCM Inc.
(FXCM) – 68% of investors had a net loss from trading currencies in
each of the past four quarters. While this could be interpreted to mean
that about one in three traders does not lose money trading
currencies, that's not the same as getting rich trading forex.

Note that those numbers were cited just two months before an
unexpected seismic shock in the currency markets highlighted the
risks of forex trading by retail investors. On January 15, 2015,
the Swiss National Bank abandoned the Swiss franc's cap of 1.20
against the euro that it had in place for three years. As a result, the
Swiss franc soared as much as 41% against the euro and 38% versus
the U.S. dollar on that day.
Answer Continued
The surprise move inflicted losses running into the hundreds of
millions of dollars on innumerable participants in forex trading, from
small retail investors to large banks. Losses in retail trading
accounts wiped out the capital of at least three brokerages, rendering
them insolvent, and took FXCM, then the largest retail forex brokerage
in the United States, to the verge of bankruptcy.

Here then, are seven reasons why the odds are stacked against the
retail trader who wants to get rich through forex trading.
SEVEN RESONS

Excessive Leverage Asymmetric Risk to Platform or System

Reward Malfunction

No Information Edge Currency Volatility OTC Market

Fraud and Market

Manipulation
 Excessive Leverage
Although currencies can be volatile, violent gyrations like that of the aforementioned Swiss franc
are not that common. For example, a substantial move that takes the euro from 1.20 to 1.10
versus the USD over a week is still a change of less than 10%. Stocks, on the other hand, can
easily trade up or down 20% or more in a single day. But the allure of forex trading lies in the
huge leverage provided by forex brokerages, which can magnify gains (and losses).

A trader who shorts EUR 5,000 at 1.20 to the USD and then covers the short position at 1.10
would make a tidy profit of $500 or 8.33%. If the trader used the maximum leverage of 50:1
permitted in the U.S. for trading the euro, ignoring trading costs and commissions, the potential
profit would have been $25,000, or 416.67%. (For an explanation of how to calculate forex P/L,
see How leverage is used in forex trading.)
Of course, had the trader been long euro at 1.20, used 50:1 leverage, and exited the trade at
1.10 to the USD, the potential loss would have been $25,000. In some overseas jurisdictions,
leverage can be as much as 200:1 or even higher. Because excessive leverage is the single-
biggest risk factor in retail forex trading, regulators in a number of nations are clamping down on
it.

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Asymmetric Risk to Reward

Seasoned forex traders keep their losses small and offset these with sizeable
gains when their currency call proves to be correct. Most retail traders,
however, do it the other way around, making small profits on a number of
positions but then holding on to a losing trade for too long and incurring a
substantial loss. This can also result in losing more than your initial
investment.
Platform or System Malfunction

Imagine your plight if you have a large position and are unable to
close a trade because of a platform malfunction or system failure,
which could be anything from a power outage to an Internet overload
or computer crash. This category would also include exceptionally
volatile times when orders such as stop-losses do not work. For
instance, many traders had tight stop-losses in place on their short
Swiss franc positions before the currency surged on January 15,
2015. However, these proved ineffective because liquidity dried up
even as everyone stampeded to close his or her short franc
positions.
 No Information Edge

The biggest forex trading banks have massive trading operations that
are plugged into the currency world and have an information edge
(for example, commercial forex flows and covert government
intervention) that is not available to the retail trader.

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 Currency Volatility

Recall the Swiss franc example. High degrees of leverage mean

that trading capital can be depleted very quickly during periods of
unusual currency volatility such as that witnessed in the first half of
2015.

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 OTC Market

The forex market is an over-the-counter market that is not centralized

and regulated like the futures market. This means that forex trades
are not guaranteed by a clearing organization, which gives rise
to counterparty risk

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Fraud and Market Manipulation

There have been occasional cases of fraud in the forex market, such
as that of Secure Investment, which disappeared with more than $1
billion of investor funds in 2014. Market manipulation of forex rates
has also been rampant and has involved some of the biggest
players. (For more, see How the forex "fix" may be rigged.) In May
2015, four major banks were fined nearly $6 billion for attempting to
manipulate exchange rates between 2007 and 2013, bringing total
fines levied on seven banks to over $10 billion.
 Thanks for Reading
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