Can You Get Rich by Trading Forex?

Forex traders aspire to become rich through currency trading, but it does not happen overnight. It can take years for a retail trader to grow a small trading account into a big one. And there is always risk involved. In this video, Alison discusses how traders can grow a trading account and what sort of returns you can expect from Forex trading.

Transcript

Often, we hear stories where Forex traders claim to have made a fortune in a short span of time and go on to lead an extravagant life with fancy houses and sportscars. 

We’ve all seen those ads on Youtube. However, most of these stories end with a link to open an account with some Forex broker or to buy a trading system. While common sense will dictate that we should brush away such stories as marketing gimmicks, it is also true that some individuals have made big money through Forex trading. 

Becoming rich

Before we decide whether a trader can really become rich by trading on the Forex market, we need to define what ‘rich’ means. A person who earns $50,000 equivalent in some of the third-world countries could be considered wealthy. However, this amount in the USA and Western Europe would be classified as a middle-class income.

Ten years ago, a person would be considered rich if they had at least $1 million cash in a bank account. However, taking into account the effect of inflation, the amount is higher now, and a recent survey by Charles Schwab found that people felt they were wealthy if they had between 2.2 and 3 million dollars in the bank. Although this amount varies depending on which country you live in, we will use $2.20 million as a benchmark for wealth and talk about whether you can achieve this through forex trading. 

Becoming rich with Forex trading

It is possible to become rich through currency trading. However, it cannot happen overnight. It can take years for a retail trader to grow a small trading account into a big one. And, of course, there is a risk of losing it all. 

And this brings us to the question of the optimal starting capital in a Forex trading account. There are Forex brokers who allow trading with just $1 in the account.

However, it is not possible to earn a meaningful stream of income with such a small amount. This is because you will have to trade with leverage to open a position – most brokers have a minimum position size of 0.01 lots, which would mean using 1000:1 leverage on a 1 USD account. As a result,  for each pip gained or lost, you would gain or earn 10c. This also means that for a 10-pip loss, you would blow your entire account.

Or you could face a margin call with a loss of just 50% of your margin or 5 pips. 

Additionally, as a rule of thumb, a trader should not risk more than 2% of their capital with any trade or risk more than 5% of their trading capital per day. With a starting balance of just 1 USD, this means risking only 2c of your balance, which is minute. 

Going by this rule, someone who trades 0.01 lots, uses a leverage of 1:100 and places a stop-loss order at 50 pips away from the entry may need roughly $350 in starting capital. 

Anything lower than that would trigger premature stops. The risk of loss decreases as the initial capital increases, provided the trader uses prudent risk management and position sizing techniques.

While a sum of $350 may be sufficient to start Forex trading, it would be a task to grow such a small investment into millions of dollars. By increasing the starting amount, a Forex trader can considerably decrease the time and effort required to achieve the coveted status of ‘being rich.’ This is because large volumes can be traded with relative ease. A few big trades could take the balance closer to the desired level. As long as the lot size is determined conservatively, it would be easier to grow a trading account quickly with a large initial investment.

A trader starting with $2 million trading capital is just a few steps from becoming rich. But, someone starting with $10,000 will have to demonstrate years of profitable trading to join the ranks of the wealthy. Even $100,000 would require a lot of time and dedication from a trader to raise the sum into the millions. Another way of looking at it is looking at your return on investment.

If you make 5% on your initial deposit in a month, this return would be very different if you started with $5,000 than if you started with $500,000.

A 5% return on $5,000 is $250. If you multiply that by 12 (to get your total profit for the year), you would have $3,000. This is a return of 60% on your initial investment, so it is an excellent rate of return. But it will take you many years to become rich.

However, if you had $100,000, a 5% return would be $5,000. Over a year, $5,000 a month would add up to $60,000.

And, if you don’t need to withdraw your profits straight away, that’s when things get more interesting.

The reason for this is that your account balance will benefit from compounding. If you started with an account balance of $100,000, for instance, and had an account balance of $160000 by the end of the year, you would have much higher starting capital for the next year.

This means your profit at the end of the following year will be 2%, 5% or 10% of $160,000, rather than $100k. And this would compound year after year. 

Therefore, initial capital put forth by a currency trader has a considerable impact on the overall chances of becoming rich. However, it is not the only criterion.

To succeed in trading, a trader should have good knowledge of fundamental and technical analysis. Traders should keep themselves up-to-date with the latest news, political events, and industry developments. For example, unexpected central bank rate hikes or cuts, poor GDP and job data, a terrorist attack, a war between two countries, UN sanctions, riots, etc., can create unexpected trend reversals, leading to huge losses or even a wipe-out of accounts. So, a trader can go broke quickly. That’s why we advise investing only surplus funds in Forex trading.

The percentage of traders who successfully complete one year without blowing their account is very small. During our podcast interview with Chris Weston, a top analyst at Pepperstone, he said that if traders could make it one year and break even on their account, it would be an excellent achievement. However, in most cases, beginner traders lack discipline and do not stick to a well-tested strategy.

Additionally, the misuse of leverage is also one of the reasons for the failure of most beginner traders. Therefore, a Forex trader who is well-prepared, analyses their trading mistakes, remains disciplined, shows patience, follows an economic calendar, and uses reasonable leverage can become rich by trading in the Forex market over a period of time.

Invariably, all Forex traders aspire to become rich. However, only a handful of traders succeed in their endeavour. Similar to any other profession, dedication and discipline are a must to prosper by trading in the currency market.