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Can you get rich by trading forex? FX trading explained

In this image Forex charts.
Ben
Jordan
Updated: 06 Aug, 2020
14 mins read

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We often hear stories about people making a lot of money through the foreign exchange market (also called Forex or FX) trading. From a 23-year-old college dropout who claims he has become a millionaire after teaching himself to trade Forex on YouTube to a teenager who turned £150 into £63k in a year or a “million-dollar granny” Ingeborg Mootz who became a forex millionaire in her 80s; the Internet is filled with forex success stories.

But is forex trading really that easy? And can you get rich by trading forex or even become a multi-millionaire in a few years? Unfortunately, in reality, things may not be so straightforward. While there are many forex investors, few are truly successful ones. Thus, for many people becoming a millionaire through forex trading won’t be easy (if it happens at all), and it will include trial and error along the way.

Now, you may be wondering what could have led to this? There are many different factors at play, from a trader being controlled by his or her emotions while making a trade, trading without a clear strategy, having unrealistic expectations, lack of risk management skills and many other factors.

Additionally, some people argue that nearly all of the most successful traders in the forex market either have financial leverage (unlimited amounts of money) at their disposal or can obtain insider information (which gives them an unfair advantage in the market) before placing a trade. All of these factors combined could contribute to regular retail customers having a hard time succeeding at forex trading

Overall, while it is possible to earn sustainable profits trading forex (and you are encouraged to do so), you have to remain diligent, practice a trading discipline and immerse yourself in learning everything you can about forex trading. Otherwise, you risk losing money in Forex.

Now, let’s discuss what Forex is, how it works, popular forex brokers, and the risks associated with forex trading to help you avoid being naive and hopefully succeed at forex trading.

What is Forex?

Forex (also called foreign exchange market or FX) is the trading of one currency for another. In Forex, traders exchange one currency for another due to many reasons, but making a profit remains the primary one. The currencies can be exchanged in an open market regulated by financial authorities (for example, banks and hedge funds), which allows traders to buy and sell currencies from all over the world. Investors can also speculate on the anticipated price fluctuations and make a profit by trading in this market.

The forex market can be used by commercial and central banks, hedge funds, firms, private companies, and individual investors to acquire the currency of a specific country. These transactions are closely related to tourism, international trade and speculation, among other things.

Forex liquidity

A market that trades 24 hours a day, five days a week like Forex, is considered a liquid (active) market. However, it is essential to note that not all trading pairs are liquid. For example, if a country does not have a sizable economic contact with other countries, the liquidity of its currency is reduced.

In Forex, the most commonly exchanged currencies are the eurozone’s Euro with the US Dollar through the EUR/USD trading pair. Other relatively popular currencies include the British pound (GBP), the Japanese yen (JPY), and the New Zealand Dollar (NZD). Each country in the world with an active currency can have access to the FX market. 

Traders can also use Forex to search for safe investments and hedge against inflation (precisely, if a country has an unstable currency due to the economic situation of the country involved, geopolitical risk, etc.,) and diversify portfolios. Overall, each trader has their reasons why they are entering the forex exchange market.

How does the forex market operate?

As we have previously mentioned, large banks and other financial institutions are participating in the forex market. The institutions use their platforms to operate that differ from those used by traditional retail investors. For example, large institutions trade through Over-The-Counter (OTC) desks (direct off-exchange trading between two parties, without the supervision of an exchange). At the same time, retail investors can start trading on the Internet in just a few simple steps.

Since Forex is a liquid market, trading operations can be conducted on a 24-hour basis. Compared to traditional stock markets, it could be concluded that the Forex market “never sleeps.” Of course, there are some exceptions for some trading pairs and some platforms and countries.

As reported by Tradingview, the most traded FOREX pairs in the world are the following:

  • EURUSD 
  • USDJPY
  • GBPUSD
  • AUDUSD
  • USDCAD
  • USDCHF
  • NZDUSD

The EUR/USD trading pair alone accounts for about 30% of the total trading volume in the FX market globally. This could be due to the close geopolitical and economic relations between the United States and Europe.

Furthermore, the EUR currency represents the eurozone rather than the entire European continent, which means that the volume would be higher if we considered  countries such as Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden that are not yet in the eurozone.

The most commonly used Forex market is the spot market. This is where traditional retail traders place their trades and speculate with price fluctuations. Meanwhile, the forward and futures markets are mostly used by larger institutions that need to plan their investments and hedge against fluctuations in the FX market.

Is it hard to trade Forex?

The answer is: it depends. Especially since every trader has a different trading strategy, and there is no specific way to trade in the forex market. Overall, the more you know about the financial markets and trading, the easier it is to trade in the forex market. 

It is also worth pointing out that forex attracts a large number of technical traders. These traders follow technical analysis of price charts and look for specific indicators to develop theories about what direction the market is likely to move. As a result, it can be challenging to compete with these traders for a newbie.

To increase the chance of successful trading in Forex, you need to pay attention to fundamentals. However, even if you can quickly get up to speed, it might still be challenging to make a profit. You should always anticipate that some of your trades will not be successful due to market unpredictability and volatility. What is important is that you make more profitable trades than losses long term.

What are the risks of Forex trading?

Forex trading can certainly be risky. The forex market is a zero-sum game. Meaning, that for someone to make a profit, there must be a losing counterpart.

In forex trading, you can control the level of risk you take. When analyzing specific currencies, consider different factors. For example, the fact that some currencies are more unstable than others. As an example, let’s discuss the Turkish lira (TRY), the Ukrainian Hryvnia (UAH) and the Argentine peso (ARS) since these currencies continuously fluctuate due to many different reasons.

The Turkish lira is profoundly affected by the level of credit in the economy. The larger the credit, the larger the economic expansion, and the higher the possibilities are of having a stronger TRY. The lower the credit on the economy, the lower the chances for Turkey to have a stable, strong currency.

Ukraine, on the other hand, is affected by geopolitical tensions. For example, the recent conflict with Russia over the Crimea region. The conflict has created instability in the country, pushing the Ukrainian government to print more money to deal with a sudden increase in military and social expenditure. As a result, the local currency, UAH, has been negatively perceived internationally.

Furthermore, in the case of Argentina, the Argentinian economy has been managed by the government that handled large fiscal deficits and used inflation as a means to finance the government’s expenditure. As a result, after having a 60% inflation, the Argentinian currency possesses a high level of risk for investors.

Overall, as we have seen from the above examples, significant economic, political and social events can weaken and straighten currencies. Therefore, before investing in Forex, always follow the news and educate yourself about what is happening around the world, as international events could negatively affect your investments.

Even the most recent event, coronavirus pandemic, demonstrates that unexpected things happen all the time. In the case of coronavirus, we see emerging currencies falling against the US dollar to almost record-high numbers.

Finally, when participating in forex trading, don’t forget to consider interest rates too. Because when interest rates grow, the demand for a specific currency grows as well. Many investors are likely to try to acquire that currency to make a profit, too, with generally low risk.

What about Forex trading with leverage?

Leverage is a risk for traders in the Forex market. The main reason it is viewed as a threat is that traders can get liquidated in just a few minutes after they place a trade.

Trading with leverage is extremely risky and should only be done by experts. Regular traders should analyze their stop-loss, decide which leverage level to use and have a precise method in which their analysis is cancelled/confirmed.

To successfully utilize leverage, you have to know what you are doing. Have a clear plan, do a proper analysis and always make sure that you can pay your margin price. While leverage can be extremely profitable, it has very high risks for inexperienced traders.

If you are trading in volatile market conditions, it will undoubtedly be essential to consider that an aggressive margin could close your position and register losses. For expert traders, this could be a great way to make more significant profits in shorter periods. 

With what amount you can start Forex trading?

To facilitate a Forex trade, you will most likely need to use a middle-man, also known as a broker. Different online platforms act as forex brokers and allow retail investors to make forex trades. Each of these platforms charge different fees for their services. It is worth noting that some countries have restrictions that apply to brokers, making it more challenging to operate.

While trading through individual brokers may be expensive, the majority of the platforms are very affordable. You can start trading with as little as $10 deposit. While it is smart to start trading with a modest amount while you are still learning, you have to know that to make a sizeable profit with small amounts; you will need to take tremendous risks.

Before trading, consider reading some investment books, ask your financial advisor for advice, and never invest more than what you can afford to lose. Knowledge might definitely assist you in getting rich by trading forex.

Popular Brokers

The most popular forex brokers are IG Markets, CMC Markets and Oanda. These platforms offer not only the easiest way to start trading currencies in the forex market, but they also have global CDFs, instruments, indices, commodities, metals and other goods for trading. Additionally, some of the brokers even allow you to trade cryptocurrencies.

IG broker

IG Broker has been operating for more than 40 years and offers solutions to traders in different markets and industries. In addition to Forex trading, IG broker also offers stock indices, equities, commodities, bonds, digital assets, and more. The fee for trading on this platform is 0.6 pips on the EUR/USD trading pair. However, costs can change based on the trading pair used.

IG broker / www.ig.com

If you are looking for a broker with a large trading volume, long trajectory, and a recognized experience, choose IG broker. The platform is regulated by several financial institutions, including the Commodity Futures Trading Commission (CFTC), the Financial Conduct Authority (FCA), and even the Monetary Authority of Singapore, which can give you security.

This broker also uses the industry-standard platform to trade called MetaTrader 4 (MT4). The platform is the most straightforward platform available to trade in the forex market. By using MT4, IG broker provides services to both; expert traders and newcomers to the market.

Finally, since IG offers several financial trading tools, one of the best things about it is that there are thousands of markets where you will be able to trade. As a result, it is one of the best platforms to engage in the forex market.

CMC Markets broker

CMC Markets is another great platform to start trading in the forex market. This platform allows traders to open an account in a few seconds with a minimum funding of $0. This feature is incredibly useful for newcomers who want to start trading with modest amounts of money.

CMC Markets broker / cmcmarkets.com

Besides, CMC Markets is a comprehensive platform for an institutional or larger trader who wants to have more professional tools when analyzing the markets. This broker includes dedicated solutions for those that require them, showing they are ready to meet the demand of even the most demanding traders.

There is a free service that can work for most casual traders, but some features require users to pay a fee for including them on their accounts. In addition to all the things discussed above, the platform also demonstrates sophistication and experience in offering clients all the necessary tools they need to trade in the forex market.

Lastly, an interesting feature of CMC Markets is that users can access their accounts on a wide range of platforms, including smartphones and tablets. This accessibility allows users to take their funds and trade in the market anywhere they are.

Oanda broker

Oanda is also one of the most popular trading platforms for FX traders. This platform operates in a wide range of countries, including the United States, Canada and Australia. Oanda broker has been working for the past couple of 23 years, offering clients the most reliable technology services related to the Forex market.

Oanda broker / www.oanda.com

As previously discussed brokers, Oanda too, allows its users to start trading with a minimum of $0 in their accounts. By using this platform, users can enjoy features that only a few other brokers can offer. Oanda also provides access to real-time rates for most of the major FX pairs and valuable historical exchange rates on over 38,000 forex pairs.

Too, this broker works with MetaTrader 4, and it offers support for mobile phones and tablets. Oanda is also a regulated platform by several countries and financial authorities. 

Forex.com broker

Forex.com trading broker is a company that focuses only on the FX market, similar to what Oanda does. The firm was also able to be registered with several financial authorities, and it has been operating for several years. 

Forex.com broker / www.Forex.com

One of the main differences with other brokers is that Forex.com currently requires users to fund their accounts with at least $50 minimum.

The firm has attracted several customers from different countries, including the United States. Moreover, Forex.com works with analysts who provide market analysis and other financial content to help clients make better decisions when they trade in the Forex market. This is the main difference compared to other platforms.

Conclusion

To sum up, in this guide, we have discussed whether you can get wealthy by trading in the forex market. As you have noticed, the answer is complicated and depends on a wide range of factors, including your previous trading experience, the broker you choose to work with and others.

If you are a newbie and decide to proceed with forex trading, you have to educate yourself about the markets, trading strategies and risks associated with trading. Finally, if you can combine all of these things, you can earn sustainable profits trading forex. However, always remain diligent and critical and accept the fact that markets change quickly.

F.A.Q. about Forex trading

What is Forex?

Forex (also called foreign exchange market or FX) is the trading of one currency for another. In Forex, traders exchange one currency for another due to many reasons, but making a profit remains the primary one. The currencies can be exchanged in an open market regulated by financial authorities (for example, banks and hedge funds), which allows traders to buy and sell currencies from all over the world. Investors can also speculate on the anticipated price fluctuations and make a profit by trading in this market.

The forex market can be used by commercial and central banks, hedge funds, firms, private companies, and individual investors to acquire the currency of a specific country. These transactions are closely related to tourism, international trade and speculation, among other things.

Is it hard to trade Forex?

The answer is: it depends. Especially since every trader has a different trading strategy, and there is no specific way to trade in the forex market. Overall, the more you know about the financial markets and trading, the easier it is to trade in the forex market.

What are the risks of Forex trading?

Forex trading can certainly be risky. The forex market is a zero-sum game. Meaning, that for someone to make a profit, there must be a losing counterpart.

With what sum you can start Forex trading?

The minimum deposit amount to start trading Forex is $0 (no minimum deposit). You can make a transfer to your bank account that the bank will process. Other platforms have a minimum required deposit of $200 – $300 USD.

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Ben Jordan
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Ben Jordan is an experienced author, trader, markets analyst, signals strategist, and funds-manager with a deep knowledge of market cycles and financial indicators.