Do Forex Traders Actually Make Money?

Is it Possible to Make Money?

The answer to the question is yes, it is possible to make money trading forex when you know what you are doing. However, most people that attempt trading the markets themselves end up losing money. Various sources heavily suggest that up to 95% of forex traders lose money.

Sold the Dream

There is a big problem today, which is social media; attracting young enthusiastic minds with the completely wrong messages. These platforms accommodate a plague of forex related advertisements from trading programs to mentorships, with a tone that promises much wealth in a short period. Several of these ads show pictures of so-called ‘traders’ with their high-end sports cars, big watches, living these lavish lifestyles, indicating that anyone can have this via forex.

Many people end up signing up to these programs after being sold the dream. In hindsight, most of these interested people will end up being given a reality check and losing the young, excited enthusiasm they may have initially had. Unfortunately, forex is sold as a get quick rich scheme, with layers upon layers of people who are keen to take your money, in one form or the other.

Enough Starting Capital

One of the critical factors to think about when looking to start forex trading is how much money are you going to begin trading with. Accounts can be open with a small deposit, and the minimum across the industry is generally $200, but some brokers go as low as $100.

The benefit of trading with a small account as noted above is that if you were to lose that initial starting capital (which is of high probability), it should not be too much of a burden on your financial stability. It is all relative to your financial situation. As an example, if you have a net worth of $2,000 and you are trying to trade with a $500 account, then this could be problematic. The wording of “small account” comes down to an individual’s situation of affordability.

However, with a small account, you may not be able to weather a potential storm of a significant pullback in the market or a timeframe that incurs much volatility. Your stop losses may be too small and close to the current price, given the size of your account.

Furthermore, it’s easy for you to fall into the trap of “I’ll just try to double, triple or quadruple my account size, then I will trade normally abiding by textbook risk management.” Such trading behaviour is very likely to backfire, as emotions will be running high watching a massive swing in your profit and loss. It will then result in you making bad trading decisions.

Even if you do get that stroke of luck seeing a decent burst and result in the ability to make a massive gain, it’s very rare for a trader to then cut back their position size after gaining like that. Greed, which is a massive killer of forex trader accounts, eventually takes over and then you blow your account anyway.

Leverage Abuse

Most people trading a small account quite often will take up the more substantial amounts of leverage offered by their broker. The high leverage in effect gives you the ability to control a large sum of capital using none or very little of your own money and borrowing the rest.

You do have an opportunity to make more money with a small input; however, the big issue, of course, is that with high leverage, it can quite often lead to massive losses. In terms of the losses incurred, they can even succeed in your initial starting capital. If you are risking a few hundred dollars and it doesn’t make any difference to your finances, then that risk may be advantageous for you.

Lack of Patience

Going back to the problem with social media, where people are sold the aspect of getting rich quick with forex, they have programmed that expectation in their heads. For somebody that makes $50,000 a year, it’s not going to be much of incentive to gain $100 at the end of the same year from trading.

It will then come down to a matter of patience, and whether or not you have any. Most people naturally do not. A reason as to why most traders with a small account have major issues is because of the promise of significant reward, which makes it challenging to stay focused. As a result, it will then likely lead to over-trading, or over leveraging your account. Traders are then driven on most cases into a vicious cycle of blowing up accounts. Many of them will continue to do this, despite the harsh lesson of it already happening.

Conclusion

In summary, yes forex traders can make money; however, as detailed above, there are many problems where people fail to do so. Perception and false expectation are a huge downfall from the get-go for most traders, resulting in a lack of patience for the process. If you are thinking about trading and want it to be worthwhile, ensure you conduct thorough education.

If you make 1% on a $10,000 account, which is $100, that is by far more sustainable and likely to happen than trying to make 10% on a $1,000 account. The solution is obvious; trade with a more substantial account size, you will much likely have better chances of making money.

You should also consider building up your account gradually and responsibly while adding capital to it along the way. As a starting point, you can look at adding between $50-$100 per week into your account to build the balance. In the not so distant future, you can then find yourself trading with enough capital to make a difference.

It is one of the biggest problems that most traders face in the forex market; they do not want to respect the process. Retail traders have that unrealistic expectation of outperforming many of the professionals, who are in a better position with the tools and experience. Your trading capital is vital; you should worry about its preservation first, and then look at adding to it once you prove your profitability.

Featured image courtesy of Shutterstock.

Author:
Ken has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.