Can Forex Make You Rich?

Can Forex
Trading Make
You Rich?

For many that have yet to invest in the financial markets, one of their first questions is, can you get rich trading forex?

Getting rich is most people’s dream and so it’s unsurprising that this is one of the most common questions among new forex traders who want to know their odds of becoming rich very quickly with forex trading.

The short answer is this – yes, you can get rich if you trade forex or CFDs. However, you have to understand that forex trading is not some get-rich-quick scheme. Forex trading (short for foreign exchange trading) and currency trading is a skill, and like most skills, it takes time, patience, diligence, and experience to learn and refine. Success won’t happen overnight and anyone who says otherwise probably doesn’t have your best interests at heart.

Getting Rich with Forex Trading

The forex market is the most-traded financial market in the world due to its liquidity and an enormous $6 trillion daily global trading volume. You would think that day traders all over the world would be making a killing in the market, but success is actually limited. The failure rate in the forex industry amongst currency traders is very high, with an estimated 80-95% of aspiring traders losing money and quitting in a few years.

However, for 90% of these traders, their shot at building wealth is destroyed by their own serious mistakes. In view of this, let’s take a look at the most common of these mistakes and what you can do about them to increase your chances of building wealth with forex trading.

Mistake 1:
Being a Bad Fit for
Forex Trading

Forex trading is for people who can afford to indulge in it. What this means is that it’s only for people who can afford to lose the money they invest. Trading is probably a bad fit for someone who is knee-deep in debt and can’t afford to pay their bills.

Trading tip: Never take out loans to fund your trading. Trading the forex markets involves significant risks and losing streaks are inescapable. Sometimes the markets won’t move for days despite you making the right trade, therefore, you never really know when you will make enough gains to repay the loan. Worse still, you may end up losing all the borrowed money, further damaging your finances.

Mistake 2:
Having Unrealistic
Goals

Many traders have this misguided goal of making millions with forex trading, but in reality, many lack the discipline required to learn the art of trading. It’s important never to think short-term because forex trading is a skill that requires time and deliberate practise to learn and master. There’s no substitute for the hard work that goes into methodically finding what works for you.

It’s also important to set realistic goals of how much you can earn with forex trading. It’s impractical to start trading with $50 and expect to become a zillionaire. For many people, $5,000 is considered a healthy trading capital with which you can make a decent start.

However, even with this much, you’re not guaranteed that you’ll become rich fast. It’s possible to start trading with way less than $5,000 but you have to accept that it will probably take you longer to see any traction and you need to set your goals accordingly.

Trading tip: Don’t aim to be rich with trading, rather, make it your goal to achieve consistent profits. When you master getting profits consistently, getting rich will follow.

Use the SMART method to bring structure and manageability into your financial goals. With this method, your goals are Specific, Measurable, Attainable, Relevant and Timely and you can set realistic profit expectations.

Mistake 3:
Getting into Forex
without any Education

One of the most common mistakes among traders is believing that you can succeed without any trading education. Expecting the best trading results without any education is like trying to run before you can walk, it can only end badly.

Successful traders need to invest time in trading education that helps you understand trading right from the basics. This education will help you to analyse and make educated decisions during daily trading activities. For long-term progress, you should aim to regularly improve your trading knowledge

Trading tip: Invest time into getting high-quality forex trading education resources such as these eBooks from FP Markets which cover the basics of technical and fundamental analysis. Not only will the knowledge help you earn money with trading, but a better understanding of the markets will also help you adopt good trading habits and save you from a lot of losses in the long run. It is also a good idea to practice trading first on a demo account until you find a method that you know inside and out, and can comfortably execute. Once you have a trading system in place, you can move on to a live account.

Mistake 4:
Investing without a
Trading Plan

Many traders are under the impression that all they need to trade successfully is a solid trading strategy when in fact, a robust trading plan is the basis of any successful forex trading endeavour. A trading strategy and a trading plan are different.

A Trading Strategy

A trading strategy is simple. It has two main elements – one element tells you when to enter and the other when to exit.

Entry rules can be based on either technical or fundamental analysis. For instance, an entry rule for a trading strategy could be “watch the events of the 30 to 60 minutes after the morning gap and open a trading position based on these events.”

There are two types of exit rules, exit rules for limiting risk (stop-loss orders) and exit rules for taking profits (take-profit orders). For example, you might enter an order to buy GBP/USD at 1.3100. To avoid losses once a price threshold is reached, an exit strategy can involve placing a stop-loss order at 1.3085. This limits your risk of loss on the trade to 15 pips.

A Trading Plan

A trading plan is more complex than a trading strategy. A plan covers several crucial elements of trading, including the strategy. Some elements included in a trading plan are:

  • Your knowledge of trading and the markets, the reason why you’re trading, and the markets you want to trade.

  • Your strengths and weaknesses and your financial goals.

  • Your risk appetite and an outline of how much you can afford to lose.

  • The trading currencies you’ll mostly invest in: majors, minors, or exotics

  • The kind of analysis you’ll use to set up your trades: fundamental analysis, technical analysis, or sentiment analysis.

  • The timeframes you want to trade

  • A description of your trading strategies including entry and exit rules and your rules for when to or when not to trade.

  • The money and risk management approach you’ll take including the leverage you’ll use.

  • Your plan for dealing with big profits and losses.

A trading plan is more comprehensive than a trading strategy and it essentially defines your goals and trading strategies.

Trading tip: You should always have a trading plan which you improve as you go. This will allow you to trade in a consistent manner, where you will be able to spot trading opportunities and you will also be able to better manage your positions compared to traders without a plan.

However, merely having a trading plan is insufficient on its own - you need to stick to the plan. This is what separates professional traders and amateurs who trade spontaneously and based on their feelings while forgetting to follow the plan even if they have one. A trading plan instils discipline and helps to avoid excessive losses, especially when the markets are against you.

Mistake 5:
Excessive Leverage

Leverage is a great trading tool that allows you to participate in markets you couldn’t trade otherwise. For example, you can open a $100,000 (1 standard lot) position with $10,000 in your account if you leverage your account 10 times.

Many traders see the advantage of leverage – the larger gains on a profitable trade, however, leverage cuts both ways. It can easily magnify your losses as much as it magnifies the wins. The larger the position on a losing trade, the larger the loss will be.

Example: Magnification of loss with leverage

If you deposit an initial margin of $10,000 at a 50:1 leverage, you get a maximum position size of $500,000 (5 standard lots). If you take a position in USD/CAD at 1.31 using the maximum position size, every pip change in USD/CAD is worth about $38.17 ([$500,000 x 0.0001 pips]/1.31).

Nonetheless, USD/CAD can move more than 100 points per day. This means if you’re positioned the wrong way you can lose over $3,817 or over 38% of your capital in one trade. Taking this into account, it’s clear that excessive leverage can wipe out your trading capital fast.

Trading tip: Leverage is a tool, and like any other trading tool, you should learn how to use it wisely. Don’t be deluded by the appeal of large profits, just because you can get 30:1 leverage doesn’t mean you have to use it all.

Mistake 6:
Trading without
Knowledge of Risk
and Money
Management Rules

If you want to increase your winning trades, your trading plan should include detailed money and risk management rules. For example, some traders forget or overlook the stop-loss order. Without a stop-loss order, your position can fluctuate freely depending on market movements, leaving you vulnerable to big swings against your position. Simply using a stop-loss order can minimise risk and cut losses.

Some of the common risk and money management guidelines include:

  • Using stop-loss and take-profit orders to identify in advance how much you stand to lose or gain with each trade.

  • Using a minimum risk/reward ratio when setting up take-profit and stop-loss orders. Most traders consider a minimum ratio of 1:2.

  • Keeping your risk level consistent even when you’re making money.

  • Not falling into the trap of averaging down when the market goes against you. Averaging down is adding to your position as the market moves against you, in the belief that the trend will reverse.

  • Quantifying your risk capital and as a general rule, not risking more than 1% of your capital on a single trade. This means that you use a stop-loss order to close out your position if it results in more than 1% loss of your trading capital.

  • Avoiding trading too aggressively. Aim to adjust your risk levels to reflect the volatility of the currency pairs you’re trading.

  • Understanding leverage and using it effectively as a tool.

Trading tip: Your money management and risk guidelines will evolve with time as market conditions, your experience, and your capital change. Keep a trading journal to follow your progression and improve your trading strategy.

Mistake 7:
Not Sticking to the
“Cut Your Losses and
Let Your Profits Run”
Adage

Experienced traders know to cut their losses while they are still small and they offset the losses with sizable gains. However, many retail traders fail to do this.

They make small profits on several positions but then hang onto losing positions for too long or even invest more into them, hoping that the positions will reverse in their direction again and become profitable. In most cases, the prices move against them longer than expected and the losses compound.

Trading tip: Never add to a losing position. Use stop-loss orders to avoid the temptation of averaging down. Instead of focusing on just making profitable trades, aim to know how to minimise losses as well. You have a higher chance of accumulating money when you know how to make profits and minimise losses compared to when you only know how to make profits.

Mistake 8:
Choosing the Wrong
Forex Broker

Some forex brokers are poorly-managed, others are in financial trouble, and other forex brokers are outright scammers. If you choose the wrong forex broker, you could lose all your money.

Trading tip: Take your time when deciding on a forex broker. Check if they are regulated and if what they offer aligns with what you want to accomplish. Also, check the trading platform's that they offer when you are thinking about choosing your forex trading account.

The Bottom Line

Being able to avoid these common pitfalls will help you to trade in a more structured way that helps you achieve your trading goals. With some good knowledge, a reasonable amount of capital, a good forex broker, and lots of practice, you can build sizable wealth with forex trading and get rich over time.

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Source - database | Page ID - 20804

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