Can forex trading make you rich? 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.
Key Takeaways
- Many retail traders turn to the forex market in search of fast profits.
- Statistics show that most aspiring forex traders fail, and some even lose large amounts of money.
- Leverage is a double-edged sword, as it can lead to outsized profits but also substantial losses.
- Counterparty risks, platform malfunctions, and sudden bursts of volatility also pose challenges to would-be forex traders.
- Unlike stocks and futures that trade on exchanges, forex pairs trade in the over-the-counter market with no central clearing firm.
4 Types of Indicators FX Traders Must Know
Unexpected Events
To better understand the danger of forex trading, consider a relatively recent example. On Jan. 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 on that day.
The surprise move from Switzerland's central bank 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.
Unexpected one-time events are not the only risk facing forex traders. Here are seven other reasons why the odds are stacked against the retail trader who wants to get rich trading the forex market.
Massive forex plays, such as George Soros' run on the British Pound that netted him over $1 billion, are very the exception and not the rule.
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 U.S. dollar 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 $5,000 worth of euros against the U.S. dollar at 1.20 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. (ignoring trading costs and commissions) the profit is $25,000, or 416.67%.
Of course, had the trader been long euro at 1.20, used 50:1 leverage, and exited the trade at 1.10, 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.
Asymmetric Risk to Reward
Seasoned forex traders keep their losses small and offset these with sizable 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 Jan. 15, 2015. However, these proved ineffective because liquidity dried up even as everyone stampeded to close their 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.
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. These events can come suddenly and move the markets before most individual traders have an opportunity to react.
OTC Market
The forex market is an over-the-counter market that is not centralized and regulated like the stock or futures markets. This also means that forex trades are not guaranteed by any type of clearing organization, which can give rise to counterparty risk.
$6 Trillion Daily
While the forex OTC market is decentralized, it is massive, with data from a 2019 Triennial Central Bank Survey of Foreign Exchange showing that more than $6 trillion worth of currencies trade each day.
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. In May 2015, for example, five major banks were fined nearly $6 billion for attempting to manipulate exchange rates between 2007 and 2013, bringing total fines levied on these five banks to nearly $9 billion.
A common way for market movers to manipulate the markets is through a strategy called stop-loss hunting. These large organizations will coordinate price drops or rises to where they anticipate retail traders will have set their stop-loss orders. When those are triggered automatically by price movement, the forex position is sold, and it can create a waterfall effect of selling as each stop-loss point is triggered, and can net large profits for the market mover.
Is Trading Forex Profitable?
Forex trading can be profitable but it is important to consider timeframes. It is easy to be profitable in the short-term, such as when measured in days or weeks. However, to be profitable over multiple years, it's usually much easier when you have a large amount of cash to leverage, and you have a system in place to manage risk. Many retail traders do not survive forex trading for more than a few months or years.
Is Forex High Risk?
Although forex trades are limited to percentages of a single point, they are very high risk. The amount needed to turn a significant profit in forex is substantial and so many traders are highly leveraged. The hope is that their leverage will result in profit but more often than not, leveraged positions increase losses exponentially.
Is Forex Riskier Than Stocks?
Forex trading is a different trading style than how most people trade stocks. The majority of stock traders will purchase stocks and hold them for sometimes years, whereas forex trading is done by the minute, hour, and day. The timeframes are much shorter and the price movements have a more pronounced effect due to leverage. A 1% move in a stock is not much, but a 1% move in a currency pair is fairly large.
The Bottom Line
If you still want to try your hand at forex trading, it would be prudent to use a few safeguards: limit your leverage, keep tight stop-losses, and use a reputable forex brokerage. Although the odds are still stacked against you, at least these measures may help you level the playing field to some extent.
FAQs
Yes, you can become a millionaire trading forex: But you have to know it is not easy like you see on the internet advertising and TV. It depends on how much money you start trading. If you start with $5,000 and make 10% of your capital each month, yes, you will be a millionaire after 5 or 6 years.
How much do forex traders make a day? ›
Exactly how much can I make trading Forex in a day? In your strategy, you place a maximum of 15 trades a day (too many), lose 5 and win 10. You are looking at a total of 60 pips per day. As mentioned, you make roughly $20 a day.
How much money can I make as a forex trader? ›
How Much Do Professional Forex Traders Make Per Month? Forex day traders with a good strategy can make a 5-15% return on their portfolio every month. Professional, employed traders are usually paid $3,000-10,000 per month.
Who is the richest person in forex? ›
George Soros has made his way to the top of the list as one of the best Forex traders to follow and, with an estimated net worth of $8.6 billion, is definitely among the richest Forex traders in the world.
Can I make a living off Forex? ›
If you're new to trading, you might well wonder if it's really possible to make a living from currency trading, given that the majority of small traders do not. The short answer? YES! It's definitely possible to make a consistent income from Forex trading.
How long can Forex make you rich? ›
It is definitely possible to become rich through currency trading. However, it cannot happen overnight. It can take years for a retail trader to grow a small trading account into a big one. And there is always a risk of losing it all.
How much can I make with $5000 in forex? ›
Trading Leverage
Since the trader has $5,000 and leverage is 30 to 1, the trader can take positions worth up to $150,000.
How much can you make with $1000 in forex? ›
Leverage in Forex Trading
In the foreign exchange markets, leverage is commonly as high as 100:1. This means that for every $1,000 in your account, you can trade up to $100,000 in value. Many traders believe the reason that forex market makers offer such high leverage is that leverage is a function of risk.
Can you make billions from forex? ›
The answer is yes. In the year 1992, a person named 'George Soros' made one billion dollars by trading in currencies.
How to make money in forex fast? ›
The way to make money fast in forex, is to understand the power of compound growth. For example, if you target 50% a year in your trading, you can grow an initial $20,000 account, to over a million dollars, in under 10 years. Break the norm, and gain more.
FX trading and gambling are different. Gambling is where the rules are against the gambler, and unlikely to make long-term profits. In forex trading, there are no rules against the trader preventing them from making long-term profits.
How much can a beginner forex trader make? ›
If you risk $1000, then you can make an average of $20,000 per year. If you risk $3000, then you can make an average of $60,000 per year. If you risk $5000, then you can make an average of $100,000 per year. This is the same strategy, same account size, and same trader.
Do I pay tax on forex? ›
Whilst you don't have to pay Stamp Duty on CFDs, you will be liable to pay Capital Gains Tax when you buy and sell them.
Is anyone successful in forex? ›
A well-known figure in the Forex world is that 90% of Forex retail traders do not succeed. Some publications quote failure rates as high as 95%. Regardless of the actual number, having interacted with thousands of traders over the years, I can tell you that those figures aren't far off.
Did Warren Buffett do forex? ›
He takes on forex positions when he needs to hedge the risk and then holds them for a long period of time. Over many years, Buffett proved himself a strong patriot — believing in America, investing and endorsing some of the most prominent American companies when they needed him (like General Electric(NYSE:GE).
Is it hard to make money on forex? ›
It is easy to be profitable in the short-term, such as when measured in days or weeks. However, to be profitable over multiple years, it's usually much easier when you have a large amount of cash to leverage, and you have a system in place to manage risk.
Can forex become a full time job? ›
To trade in a full-time job for the life of a day trader is very much the dream of a lot of people. However, for the majority of traders, it's all about fitting their day job into the picture. If this is done effectively, you're looking at a very lucrative pursuit.
How much money do you need to trade forex for a living? ›
Minimum Capital for Day Trading Forex
For a little more flexibility, $500 can lead to slightly more income or returns. However, $5,000 might be best, because it can help you produce a reasonable amount of income that will compensate you for the time you're spending on trading.
How much you can make 100$ in Forex trading? ›
According to statistics, every year novice traders generate from 13% to 23% profits from each dollar. It is clear that a deposit amount is important. In case of $100, the profit will total from $13 to $23.
Who is the youngest richest forex traders? ›
29 year old Sandile Shezi is the self-proclaimed youngest millionaire in South Africa who has made his millions from Forex trading and takes pride in teaching other young people how to make money like he did.
There is no reason trading crypto should be more profitable than trading Forex, except cryptocurrencies tend to be more volatile than Forex, so they tend to undergo larger changes in price. Investing in cryptocurrencies is extremely risky. Is trading crypto the same as trading Forex?
How much is forex worth per day? ›
How much money is traded on the forex market daily? Approximately $5 trillion worth of forex transactions take place daily, which is an average of $220 billion per hour.
How much should I invest in forex as a beginner? ›
To navigate the inherent risk of the Forex market and the longest losing streak a competent trader will be likely to experience, you should start scalping with at least $120, swing trading with at least $720, or position trading with at least $2,500, if you are using a broker offering trading in micro-lots.
How much is a trillion dollar in forex? ›
JEL classification: C42, C82, F31, G12, G15. Turnover in global foreign exchange (FX) markets reached $7.5 trillion per day in April 2022 (Graph 1, panel A),2 a volume that is 30 times greater than daily global GDP.
What lot size is good for $10 forex account? ›
For example, go for brokers who provide 0.1 lot minimums, some even going as low as 0.01 lot minimums. These lot sizes will allow you to trade efficiently with a small initial investment. Opening a position with a 0.01 lot size, for example, would cost $1,000 or $10 with leverage.
How many dollars is a lot in forex? ›
A standard lot in forex is equal to 100,000 currency units. It's the standard unit size for traders, whether they're independent or institutional. Example: If the EURUSD exchange rate was $1.3000, one standard lot of the base currency (EUR) would be 130,000 units.
Why do I keep losing money in Forex? ›
Overtrading - either trading too big or too often – is the most common reason why Forex traders fail. Overtrading might be caused by unrealistically high profit goals, market addiction, or insufficient capitalization.
Is trading forex harder than stocks? ›
Currency markets have greater access than stock markets. Traders can trade stocks nearly 24 hours a day from Monday through Friday, but it isn't particularly easy to access all those of markets. Forex trading, on the other hand, is much easier to do around the clock, Monday through Friday.
What does God say about forex? ›
Investing in forex trading can be found in Ecclesiastes 11 verses 1 and 2. From the Good News Translation bible, it reads that "Invest your money in foreign trade, and one of these days you will make a profit."
Why is forex trading so difficult? ›
Maximum Leverage
The reason many forex traders fail is that they are undercapitalized in relation to the size of the trades they make. It is either greed or the prospect of controlling vast amounts of money with only a small amount of capital that coerces forex traders to take on such huge and fragile financial risk.
There are significant investment risks as currency fluctuations may move against you, causing you to lose money. Limited protection from risk management systems. Stop loss orders will only cap your losses. You may also pay a premium price to guarantee your stop loss order.
Do you have to report forex to IRS? ›
As mentioned earlier, forex traders should pay taxes on the profits they make in the foreign exchange market. They can file their earnings under the laws stated in section 988. The law simply puts that all capital gains made in the FX market will be classified as ordinary income and taxed.
Are forex trades reported to IRS? ›
Forex tax reporting.
Section 988 transactions for investors are reported in summary form on line 8(z), “other income or loss” of 2022 Schedule 1 (Form 1040). Watch out for negative taxable income caused by forex losses without TTS; you might waste some losses.
Do forex brokers report to IRS? ›
Forex Futures and Options Contracts
Forex traders in the US that trade currencies through forex options and futures contracts file taxes under the Internal Revenue Code (IRC) section 1256.
How many people fail in forex? ›
It is said that the failure rate in the forex industry is very high, with more than 95% of aspiring traders expected to drop out of the game within their first few years of trading. At this rate, you might have a better chance of surviving the Hunger Games than becoming a successful forex trader!
Is forex a future? ›
What's the difference between forex and futures trading? The difference is that forex trading involves buying and selling currency, while futures trading is a way to trade thousands of financial markets, such as forex, indices, shares, commodities and more.
Who is controlling forex? ›
The forex market is run by a global network of banks, spread across four major forex trading centres in different time zones: London, New York, Sydney and Tokyo.
Why do day traders need $25,000? ›
One of the most common requirements for trading the stock market as a day trader is the $25,000 rule. You need a minimum of $25,000 equity to day trade a margin account because the Financial Industry Regulatory Authority (FINRA) mandates it. The regulatory body calls it the 'Pattern Day Trading Rule'.
Is Forex a good career? ›
A career as a forex trader can be lucrative, flexible, and highly engaging. There is a steep learning curve and forex traders face high risks, leverage, and volatility.
Can someone be a successful in Forex? ›
It's possible to become a successful trader with a day job with a busy schedule. All you need is to be disciplined and patient. It takes perseverance as well as time in fully understanding how the markets work. It would also take time in determining the suitable trading plan based on your schedule and personality.
29 year old Sandile Shezi is the self-proclaimed youngest millionaire in South Africa who has made his millions from Forex trading and takes pride in teaching other young people how to make money like he did.
Can I become millionaire by trading? ›
Answer: Yes, there are individuals who have become millionaires solely through stock trading. However, it is important to note that investing in the stock market carries inherent risks and there are no guarantees of success.
Is Forex difficult to learn? ›
While the forex market can be complex and may require some study for traders to become familiar with it and trade successfully, getting involved in forex trading is relatively simple. All one needs to start trading is a bit of capital, brokerage account, computing power and internet connectivity.
Is crypto or forex better for beginners? ›
There are several reasons why forex is better than cryptocurrencies. First, the forex industry has been around for decades and is, therefore, more stable than cryptocurrencies. Second, while the industry is volatile, it is less prone to market risks. Additionally, it has a higher volume than cryptocurrencies.
Why do most Forex traders fail? ›
Overtrading
Overtrading - either trading too big or too often – is the most common reason why Forex traders fail. Overtrading might be caused by unrealistically high profit goals, market addiction, or insufficient capitalisation.
How many hours should I learn Forex? ›
On balance, it takes an average of around one year to learn how to trade Forex, but can take anywhere from 6-24 months. The basic technical analysis elements can be learnt in a few weeks, but the risk management and psychology will take longer – around a year or longer – to grasp the more you practice trading.
How old should you be for forex? ›
Step 1: Apply for a live trading account
To apply, you must be over 18 years old.
Who is the king of forex? ›
Shashikant Sharma, a King of Forex Trading.
Is trading a get rich quick? ›
Short term trading IS NOT for amateurs, and it is rarely the path to “get rich quick”. You can't make gigantic profits without taking gigantic risks. A trading strategy that involves taking a massive degree of risk means suffering inconsistent trading performance and large losses.
What type of trading can make you rich? ›
Intraday trading: This trading type makes you buy and sell your stocks on the same day before the market closes. You need to track your market position the entire day, looking for a good opportunity to sell your stocks. Intraday trading is a great method of making fast profits provided you invest in the right stocks.
The 5 Fastest Ways To Become Rich, According To Experts
- Avoid (and Pay Down) Debt. Debt is not necessarily bad in all instances, but it is something to be avoided most of the time. ...
- Spend Intentionally and Minimize Costs. ...
- Invest as Much as Possible in a Diversified Portfolio. ...
- Work On Your Career. ...
- Find Extra Work.
