Most people who join the forex trade hope to make big profits in the tweak of an eye. However, the reality is that most average retail traders experience a rocky path to riches. Massive losses and potential penury mar this path. Nonetheless, hedge fund people with deep pockets or uncanny trading skills quickly make significant profits enough to make them wealthy.
About three-quarters of investors globally make net losses from trading currencies each year. While a quarter of them do not, it doesn’t mean that all of them get rich trading forex. Unexpected events could inflict massive losses that could render a forex trader broke or bankrupt.
This article examines seven risks you should know about as a retail trader before you invest in forex to get rich.
Risks of Forex Trading
Asymmetrical Risk Reward
Most retail traders are unable to keep their losses small compared to seasoned forex traders. Experts in trading also know how to offset losses with sizable gains when they get profits. Most retail traders do the opposite. They hold on to a losing trade for longer than is necessary, thereby incurring substantial losses. At times these losses turn to be greater than their initial investment.
There is a considerable risk of excessive leverage in forex trade. Real leverage has the potential to expand your profits as much as your losses. The greater the leverage on the capital you invest, the higher the risk of assuming it. While this risk is not related to margin-based leverage, it can influence it if you are not careful.
Let’s take, for example, that there is a trader. The trader has a trading capital of US$10,000 and a trading broker who requires about a 1% margin deposit. The trader decides to trade USD/JPY at 120 in the short term.
Let us say the trader applies fifty times the real average by shorting US$500,000 based on the trading capital, which is worth US$10,000. Standing at 120, one pip of JPY/USD for a standard lot will yield US$8.3. If the JPY/USD currency rises to 121, the trade loses 100 pips on the trade, a loss that is equivalent to US$ 4150. This is about 41.5% of the loss for their trading capital.
In contrast, if the trader decides to short US$50,000 based on his trading capital worth $10,000. His investment would equal one-half of one standard lot. If the USD/ JPY currency rises to 121, this trader will lose 100 pips on the trade, a loss that is equivalent to only $415, which is represented by a mere 4.15 % loss of their trading capital.
Lack of Information Edge
Retail traders do not have information that big for trading actors like banks have. The big traders use their information edge on covert government intervention and commercial forex flows.
When there are high degrees of leverage, it could indicate that the trading capital can deplete quite quickly, especially when the currency is volatile. Events such as those that happened to the Swiss bank could move the market fast before retail traders get an opportunity to react.
Over the Counter Market
The forex market is not regulated as well as the futures or stock markets. It is an over-the-counter market that offers no security to traders. There are no guarantees for any trades in forex, which gives rise to counterparty skill.
Market Manipulation and Fraud.
It is not uncommon to hear cases of fraud in the complex forex market. For example, companies such as Secure Investment disappeared with over 1 billion dollars-worth of investment. Market manipulation of forex rates is on another level in forex trading. Some of these instances involve the most prominent players who rake in profits while retail traders count losses.
If you want to try your luck in forest trading, it is best to join the trade when you understand the inner working of the foreign trade market. You should also limit your use of leverage and utilize a reputable forex broker. Although doing this will not enable you to gain wealth and riches quickly, it will prevent you from making poor trading decisions that lead to extensive losses.