ForexSecret123 (11)

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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.
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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.
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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.
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SEVEN RESONS

• Platform or System Malfunction

• Asymmetric Risk to Reward

• Excessive Leverage

• No Information Edge

• OTC Market

• Currency Volatility

Fraud and Market Manipulation
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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 501 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 501 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 2001 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.
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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.
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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.
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