Can you get rich trading Forex? Risk and Reward of Forex Trading • Benzinga


Forex trading is often seen as glamorous and exciting since the markets trade 24/7 and money trades hands all over the world at a high rate. But forex markets are unique among asset classes, and making money trading currencies requires a different skill set than trading stocks or bonds. Forex trading should be approached cautiously, not recklessly. Here’s how to start.

What is Forex Trading?

Forex trading is the trading of different currencies in an international market. Forex is short for foreign exchange, and it is done by pairing different currencies together and betting on the direction of their relative price movements. Currencies have floating values ​​and react to a variety of different geopolitical and economic factors.

Here’s how a foreign exchange trade works: an investor thinks the price of the US dollar will rise against the euro. In this scenario, the investor will open a brokerage account with a forex broker and enter a long USD / short EUR position. All forex trades involve going short and long depending on the direction participants think the market is going. For this particular trade, if the USD appreciates against the EUR, the trade will be profitable. If the USD falls against the EUR, the trade will lose money.

Forex markets are open 24 hours a day during the trading week (Monday to Friday) and leverage is often used to extract notable profits, which means that trading in forex involves risks that traders unfamiliar with margin will need to understand before opening positions.

Understanding the Risks and Rewards of Forex Trading

Forex trading can generate profits for traders of all experience levels and backgrounds, but it’s important to understand currency risks. Assets like stocks and bonds don’t make the same kinds of moves as currencies, and a pair doesn’t need to be involved in opening a position. Here are some of the main risks of forex trading.

Available capital is required

Much forex trading is done with borrowed money, but borrowing money cannot be the main source of capital for your forex strategy, especially if you are just starting out. You’ll need a fund base to draw from and you shouldn’t risk something you can’t afford to lose. If you are heavily in debt or have high interest credit cards that require payment, focus on these areas before you get into forex trading.

Forex is not a get-rich-quick scheme.

Beware of anyone offering a path to quick profits through forex trading. Like stock trading, forex trading requires strategy, experience and good fortune to be successful. It is not a skill that can be learned overnight. If your plan is to get rich after a few months of currency trading, you will probably be disappointed and look for a way to recover your lost capital.

Unexpected events affect trading

When trading stocks, you can reduce your level of worry about world news and events and focus on the companies in which you invest. For example, a troubled bank in Europe is unlikely to cause problems for a US healthcare company like UnitedHealth. But currencies are affected by all kinds of things happening in the world. An unexpected shortfall in a wheat crop, extreme weather in an economically important region, or a surprise election result in a neighboring country are just a few examples of events that can send shock waves through currency markets. And unlike stocks, currencies trade around the clock during the week – losing money while you sleep is never a fun thing to think about.

Excessive leverage can magnify gains and losses

If you look at the forex charts on Benzinga, it may appear that the currencies make frequent inconsequential moves. Yes, a few fractions of a USD penny here and there may not look like massive moves, but looks can be deceiving.

First of all, the foreign exchange markets are massive, even bigger than the US stock market. Even a movement of fractions of a penny means that massive amounts of capital have changed hands. And second, traders use leverage to control larger positions than their actual capital allows. As minor as it may seem, every move can be devastating for a trader with improperly leveraged positions.

Platform or system malfunctions

Forex brokers are not immune to technological malfunctions and unlike stockbrokers, they don’t have the nightly downtime to update and reboot their systems. As seen with crypto brokers like Coinbase and Gemini, forex platforms sometimes go into maintenance or suffer malfunctions during volatile times, which could prevent traders from closing positions they wish to exit (or vice versa). ).

Asymmetric risk to reward

Forex traders need a plan of attack and ground rules for when to exit losing positions. One of the pitfalls that many new traders face is holding onto losing positions for too long in an attempt to break even. One big loss from an overextended position can wipe out profits from multiple winning trades, so have strict rules about when to take profit and when to eat a loss on a bad trade.

Forex market volatility

Currency markets may appear stable on the surface, but volatility occurs frequently, especially in the face of unexpected world events. The British pound took a drastic fall as the UK voted in favor of Brexit, sending many currency pairs to unexpected levels. When both volatility and leverage are present, traders should be cautious and watch positions carefully.

Lack of Edge information

Retail merchants will always be at an information disadvantage relative to large trading companies. The real-time data that sophisticated market participants receive exceeds anything a novice trader will get by searching social media or news sites. Understanding your limits is a must for new traders.

Potential fraud and market manipulation

Unfortunately, market manipulation happens in forex trading, and the scope in the past has been significant. In 2013, Bloomberg reported that five different dealers spoke of large-scale market manipulation in currency trading perpetuated by several major banks.

The practice involved placing customer orders in preview and cheating 60-second referral windows. According to dealers, the practice had been going on for several decades. In response, the UK Financial Conduct Authority fined five banks nearly two billion pounds for breaches at their forex trading desks.

OTC market

Trading OTC stocks is often considered unnecessarily risky. Now imagine an entire market operating over the counter – that’s the forex market. Despite being the largest financial system in the world, foreign exchange markets are largely unregulated and brokers do not have clearinghouses or the same level of investor protection as trading houses. regulated brokerage. Counterparty risk is something to consider when trading forex, especially on thinly traded exotic currency pairs.

Compare Forex Brokers

Choosing the best forex broker for your trading style is one of the first steps. Some brokers are geared towards more experienced and sophisticated traders; others allow beginners to learn the ropes with simple platforms and limited trading pairs. Here are some of our favorite forex brokers.

Claim exclusive offers

  • CedarFX is not regulated by any major financial agency. The brokerage is owned by Cedar LLC and is based in St. Vincent and the Grenadines.

Frequently Asked Questions

A

Forex can be difficult to learn and master because currencies move differently than traditional assets like stocks and bonds. Successful forex traders understand how to apply leverage and establish rules to guide their trading habits.

Q

Can I learn forex on my own?

A

Many resources are available to teach you forex trading, including some right here on Benzinga. But learning forex will take time, and it’s never a bad idea to use a paper trading account to practice before getting into the real thing.

A

Whether forex trading is a gamble depends on how a trader uses leverage. Trading with a lot of leverage and limited capital can certainly be considered a gamble, and many traders lose their shirt by taking on too much risk. But if you take the time to learn the market and develop a strategy, forex trading won’t feel like a night at the casino.


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