Here’s why forex trading is not a get-rich-quick scheme
There have always been and always will be people out there looking for shortcuts to increase their wealth and get rich overnight. Unfortunately, apart from winning the lottery, receiving an unexpected inheritance from an odd and long-forgotten relative, or engaging in illegal activities, there aren’t many ways to make a fortune in a short amount of time. You can read all the get-rich books in the world, and follow inspirational speakers for tips and advice on how to become a millionaire, but the chances of building instant wealth will remain slim.
In their search for fortune and success, a lot of people turn their attention to forex trading. Looking at all the stories about shrewd investors who have built their fortunes by trading forex can get you thinking you can emulate their success. The forex market does provide the opportunity to make lots of money, but if you’re hoping that trading currencies can help you solve all your money problems, you’re in the wrong.
Here we’re going to explain what forex is and isn’t, and why forex trading doesn’t work as a get-rich-quick scheme.
What is forex trading and how does it work?
In the simplest terms, forex trading also referred to as foreign exchange trading is the exchange of one currency for another. Currencies are always traded in pairs, meaning that when you buy one currency you automatically sell the other one. These transactions happen in the foreign exchange market, which is regarded as the largest and the most liquid financial market globally, given the large volume of daily trades. In 2021, the worldwide forex market was estimated at $2.409 quadrillion.
Forex trading is about anticipating whether the value of one currency will increase or decrease compared to the other, and buying or selling currencies based on these predictions in order to make a profit. There are a variety of factors that can affect foreign exchange rates such as interest rates, supply, and demand, inflation, political stability, economic health, or natural disasters. Therefore, despite having a good understanding of the forex market and a well-devised strategy, it’s still very difficult to predict price movement, so the risk of losing money is ever-present.
There are three main ways to trade forex:
The spot market – this is the main forex market where currencies are exchanged at their current value and transactions happen in real-time
The forward market – unlike the spot market, transactions in the forward market don’t happen instantly. Traders enter a contract agreeing to exchange currencies at a specified rate on a future date.
The futures market – the futures market is similar to the forward market, the difference being that the contract is standardized and the terms of the transaction can’t be changed.
Leverage is another key feature in forex trading and a tool that traders commonly take advantage of to maximize their profits. It basically works like a loan, allowing traders to borrow money from a broker in order to increase their investment capital and, consequently, the profit potential. That’s the reason why high leverage forex brokers for US residents are in high demand, despite the risks associated with trading larger amounts of currency. Leverage can be a double-edged sword indeed, given that it increases both gains and losses, so it’s a technique that has to be approached with caution.
Can you get rich by trading forex?
Now that we’ve set the record straight on what forex trading is all about, let’s get back to the question that so many people have asked themselves: is it possible to get right by trading forex? The answer is it depends. Forex does provide the opportunity to supplement your income and increase your wealth over time. You can definitely make a living out of trading forex and get rich, as many professional traders prove. If forex wasn’t a profitable activity, there wouldn’t be so many people taking part in forex trading.
However, is not as simple as reading a few articles on the topic, opening a trading forex account, doing some transactions, and then waiting for the money to flow into your bank account. Those who amass large amounts of money by trading forex certainly don’t do it overnight, with minimal time and effort investment. So, here’s a more detailed breakdown of why forex trading should not be confused with a get-rich-quick scheme.
It requires skills and experience
Successful forex traders have one thing in common – they’ve studied forex trading thoroughly, learned all the ins and outs of the market, and worked hard on building a solid trading strategy. They don’t make random or rash decisions but have a carefully devised plan that they stick to. Obviously, gaining the necessary skills and knowledge to qualify as a proficient forex trader takes time and effort. So, if you’re looking to make a large profit in a very short amount of time, forex trading is not for you.
It involves risks
Although forex trading can be a profitable form of investment when done right, the risks it involves shouldn’t be ignored. Despite proper preparation, the volatility in the market and the tendency to use high leverage to enhance profits expose traders to the risk of losing large amounts of money. Even professional traders with years of experience under their belts can suffer substantial losses. With forex, you can lose as much as you can win, meaning is not exactly the surefire strategy to make fast money that some people expect.
It requires a substantial investment
If you’re on a tight budget or you’ve hit financial rock bottom and can’t afford to lose any money, you definitely don’t want to use your last resources for forex trading. First of all, forex usually requires having a solid investment capital. Even if you manage to find the necessary funds, you have no guarantee that your transactions will be successful. If your knowledge of forex trading is limited, instead of making a fortune you’ll just further increase your debt.
The most important takeaway is that forex is by no means a shortcut to getting rich. It takes time, practice, skills, and experience to master the art of forex trading. If you’re not willing to do things by the book, it’s best to focus your attention on other types of activities.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes