Is Forex a Get-Rich-Quick Scheme or Viable Investment Choice?
The recent arrest of social media influencer and “extreme misogynist” Andrew Tate suggests that this supposedly self made multi-millionaire may have derived at least some of his income from illegal activities.
Even Tate’s more legitimate business ventures were questionable, with the controversial ‘Hustler’s University’ described by some as a de facto ‘pyramid scheme’, which generated income by simply selling the idea of getting rich without providing any actionable guidance.
The platform, which has subsequently closed, offered subscribers access to allegedly expert professors in a number of fields, including forex trading. However, the information provided through the available courses offered nothing above and beyond what was readily available for free online, while the scheme unfairly cast a shadow over the much-maligned practice of forex trading.
Of course, forex has been at the centre of numerous scams down the years, causing many to perceive this as little more than a questionable and ineffective get-rich-quick scheme. But is this fair, or is FX actually a viable investment option?
What is Forex?
Before we explore forex on a deeper level, this refers to the foreign exchange marketplace where international currencies can be bought, sold and traded.
Currencies are also traded speculatively in pairs, with so-called “major” currency pairs like the USD/EUR reflecting the largest economies in the world and comprising 68% of all daily trading activity.
Major currencies are inherently liquid and relatively easy to sell and convert into cash, making them highly popular for short-term investors and during times of economic uncertainty.
Such pairs are traded exclusively online and through online virtual brokerages, which also offer access to real-time and historical analysis and a diverse selection of datasets to help you inform your individual trades.
Exploring the Wider Truth About Forex
Arguably, it’s the fundamental elements of FX trading that trigger misconceptions in the market, as these are often misunderstood and encourage traders to turn to forex in search of quick and reliable profits. Let’s take a closer look at these:
- #1. Forex is Speculative: Trading on currency pairs can encompass investment vehicles such as spread betting and CFD trading, which are entirely speculative and negate the need to assume ownership of the underlying instrument. In theory, this makes it possible to buy (or long) or sell (go short) the asset and profit regardless of its price performance, causing some to believe that quick and sustainable profits are guaranteed.
- #2. Forex is Highly Leveraged: If you trade with a margin account, you can increase your buying power with leverage of up to 200:1 through some licensed FX brokers. This enables you to open and control positions that are significantly larger than your initial deposit, while leverage and margin enjoy an inverse relationship (so, the higher margin requirement, the lower your leverage ratio will be). However, while this can unlock significant returns, it can also lead to huge losses that can decimate your account.
- #3. Forex is a Losing Game: While the above factors are often promoted to present forex as a surefire way of accessing quick and sizable profits, with minimal risk and without being encumbered by the burden of ownership. However, it’s often ignored that some 70% of all forex traders lose money over time, with this highlighting the serious nature of the FX marketplace and the need for knowledge, determinism and viable trading strategies.
Why Forex is a Viable Investment Option – And How to Optimise Your Chances of Success
Not only do most retail traders lose money, but many lose large amounts of capital due to an excessive use of leverage and failure to appreciate the complex, volatile and challenging nature of the marketplace.
However, it should also be noted that 30% of FX traders also make money and are profitable on average, with this demographic distinguished by their willingness to learn about the forex market and cultivate practical strategies that can deliver sustainable success.
This earmarks forex trading as the opposite of a get-rich-quick scheme, as those who try to cheat the marketplace and take shortcuts to success are more likely to lose significant amounts of money.
Conversely, traders who take time to understand the market and invest with a keen sense of determinism are likely to achieve sustained success, and it’s important to bear this in mind when starting out on your forex journey.
But what practical steps can you take to optimise your chances of success in the forex market? Here are some ideas to keep in mind:
- #1. Trade the Market Using a Demo Account: While theoretical knowledge should form the basis of your forex trading career, it’s important to bridge the gap between this and real-world investing if you’re to achieve success. You can do this by utilising a demo account, which is available through all brokerage sites and affords you access to a simulated, real-time marketplace. This way, you can hone and test your speculative trading strategies, depending on your wider outlook and whether you’re in the market for short or long-term gains.
- #2. Use Leverage Conservatively: As we’ve already touched on, leverage is a double-edged sword, and one that highlights the considerable volatility and risk associated with forex. So, while reputable brokers may offer leverage of up to 200:1 in relation to the cash held in your margin account, this can increase position sizes beyond your means and trigger seismic losses. So, try to use leverage conservatively when starting out, while only increasing this in line with your experience and underlying appetite for risk.
- #3. Utilise Risk Management Measures: In order to avoid becoming one of the 70% of traders who regularly lose money, it’s important to minimise your exposure to risk in the real-time marketplace. There are various risk management tools that can help in this respect, including stop loss and take profit orders. Stop loss orders work by automatically closing positions once they’ve incurred a predetermined level of loss, which can be established before you execute the order and according to the relevant market conditions.