Can Forex Trading Make You Rich?
Can forex trading make you rich? Although our instinctive reaction to that question would be an unequivocal "No,” we should qualify that response. Forex trading may make you rich if you are a hedge fund with deep pockets or an unusually skilled currency trader. But for the average retail trader, rather than being an easy road to riches, forex trading can be a rocky highway to enormous losses and potential penury.
But first, the stats. A Bloomberg article in November 2014 noted that based on reports to their clients by two of the biggest publicly traded forex companies – Gain Capital Holdings Inc. (GCAP) and FXCM Inc. (FXCM) – 68% of investors had a net loss from trading currencies in each of the past four quarters. While this could be interpreted to mean that about one in three traders does not lose money trading currencies, that's not the same as getting rich trading forex.
Note that those numbers were cited just two months before an unexpected seismic shock in the currency markets highlighted the risks of forex trading by retail investors. On January 15, 2015, the Swiss National Bank abandoned the Swiss franc's cap of 1.20 against the euro that it had in place for three years. As a result, the Swiss franc soared as much as 41% against the euro and 38% versus the U. S. dollar on that day.
The surprise move inflicted losses running into the hundreds of millions of dollars on innumerable participants in forex trading, from small retail investors to large banks. Losses in retail trading accounts wiped out the capital of at least three brokerages, rendering them insolvent, and took FXCM, then the largest retail forex brokerage in the United States, to the verge of bankruptcy.
Here then, are seven reasons why the odds are stacked against the retail trader who wants to get rich through forex trading.
Excessive Leverage : Although currencies can be volatile, violent gyrations like that of the aforementioned Swiss franc are not that common. For example, a substantial move that takes the euro from 1.20 to 1.10 versus the USD over a week is still a change of less than 10%. Stocks, on the other hand, can easily trade up or down 20% or more in a single day. But the allure of forex trading lies in the huge leverage provided by forex brokerages, which can magnify gains (and losses).
A trader who shorts EUR 5,000 at 1.20 to the USD and then covers the short position at 1.10 would make a tidy profit of $500 or 8.33%. If the trader used the maximum leverage of 50:1 permitted in the U. S. for trading the euro, ignoring trading costs and commissions, the potential profit would have been $25,000, or 416.67%. (For an explanation of how to calculate forex P/L, see How leverage is used in forex trading.)
Of course, had the trader been long euro at 1.20, used 50:1 leverage, and exited the trade at 1.10 to the USD, the potential loss would have been $25,000. In some overseas jurisdictions, leverage can be as much as 200:1 or even higher. Because excessive leverage is the single-biggest risk factor in retail forex trading, regulators in a number of nations are clamping down on it.
Asymmetric Risk to Reward : Seasoned forex traders keep their losses small and offset these with sizeable gains when their currency call proves to be correct. Most retail traders, however, do it the other way around, making small profits on a number of positions but then holding on to a losing trade for too long and incurring a substantial loss. This can also result in losing more than your initial investment. Platform or System Malfunction : Imagine your plight if you have a large position and are unable to close a trade because of a platform malfunction or system failure, which could be anything from a power outage to an Internet overload or computer crash. This category would also include exceptionally volatile times when orders such as stop-losses do not work. For instance, many traders had tight stop-losses in place on their short Swiss franc positions before the currency surged on January 15, 2015. However, these proved ineffective because liquidity dried up even as everyone stampeded to close his or her short franc positions. No Information Edge : The biggest forex trading banks have massive trading operations that are plugged into the currency world and have an information edge (for example, commercial forex flows and covert government intervention) that is not available to the retail trader. Currency Volatility : Recall the Swiss franc example. High degrees of leverage mean that trading capital can be depleted very quickly during periods of unusual currency volatility such as that witnessed in the first half of 2015. OTC Market : The forex market is an over-the-counter market that is not centralized and regulated like the futures market. This means that forex trades are not guaranteed by a clearing organization, which gives rise to counterparty risk. Fraud and Market Manipulation : There have been occasional cases of fraud in the forex market, such as that of Secure Investment, which disappeared with more than $1 billion of investor funds in 2014. Market manipulation of forex rates has also been rampant and has involved some of the biggest players. (For more, see How the forex "fix" may be rigged.) In May 2015, four major banks were fined nearly $6 billion for attempting to manipulate exchange rates between 2007 and 2013, bringing total fines levied on seven banks to over $10 billion.
If you still want to try your hand at forex trading, it would be prudent to use a few safeguards: limit your leverage, keep tight stop-losses and use a reputable forex brokerage. Although the odds are still stacked against you, at least these measures may help you level the playing field to some extent.
Why Most People Fail Miserably At Options Trading (And How To Avoid It)
Facts are facts right? They can’t be argued. The truth is that most people who trade options fail miserably and lose money each year. But if you’re reading this blog, I think it’s safe to assume that you could be one of the people who prosper from options trading .
Let’s be honest though, most beginner options traders are not professionals by any stretch. In fact, most of them don’t even have a background in finance and don’t understand why things happen the way they do in the stock market or the economy.
For traders like this, learning to trade options and analyze the markets can be a disastrous attempt at first. But rest assured, if you practice and learn you CAN become very successful trading – don’t let anyone convince you otherwise!
Below, I list the top five reasons why most people fail when trading options.
Assuming That Options Trading Is “Simple”
Have you ever attended an options seminar, learned from some guy how “simple” it is to make a high income from options trading, yet when you went home and started trading you failed to make any consistent income?
What a classic story that is told over and over. I have been to those seminars as well and have the scars to prove it.
Realizing right now that options trading is NOT a “get rich quick” industry will save you thousands over the course of your life – maybe even millions. You have to establish a strong trading mentality which comes not by nature but is something that can be learned/trained.
Options trading is like running a marathon. There is no short cut and no easy way to make money or else everyone would be doing it, right?
You have to make a conscious effort each day to learn and get better.
Not Creating a Non-Emotional Trading Plan.
This is where a lot of beginners quite frankly fail. In order for beginners to become consistent in options trading, a robust and objective trading system should be created so that all you need to do is follow your own rules and make very limited emotional decisions. We are all human and thus our EQ (Emotional IQ) leads our decision making .
With a proven system and framework for trading like a business (and not a hobby) I can teach any person to trade options successfully. Because at this point it’s not about how “smart” you are. Rather, it’s about following the system and making non-emotional trades that generate consistent returns.
It’s Always Lack of Knowledge That Kills.
Of all the things we do in life, it’s always a lack of knowledge that hurts us the most. I always use the mechanic example when coaching students each week. It goes a little something like this…
My father was a mechanic for Nissan for many years, so he knows specifically how to tear down a car and rebuild it from the ground up. I do not know how to do this and would fail miserably if I tried.
It’s not that I don’t have a lack of ability – I can absolutely do the hard labor. And if anything, since he’s older it should be much easier for me to do the work. So the only real difference between us is that he has the KNOWLEDGE and I don’t.
As with anything, people who are wildly successful trading options continue to learn and grow each and every month. They put together a great trading plan , have solid risk management and learn about new strategies .
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Not Having a Coach.
Every great athlete knows the immense value of having a coach. The same applies in options trading.
Yes, you might do reasonably well on your own. However, if you want to avoid pointless mistakes and advance faster while getting higher returns, you certainly need a coach.
It’s not uncommon to hear failed investors make remarks as these: “I should have seen that coming,” or “If only I stayed focused, I would have made it.” In such instances, a coach would have provided valuable, impartial insight to help you avoid such disappointments. Such a coach would have to be an experienced trader with proven expertise.
Most of all, if you want to move to the highest levels, you might need not just one but a whole bunch of coaches. Just look at the great investors of our time; they have teams of highly qualified professionals guiding every aspect of their portfolios.
This is particularly valuable since no single person possesses every skill and insight in this world. You might easily overlook new opportunities that arise outside your initial plans. Alternatively, you might not be aware of external threats that may affect your plans. At the very least, it’s always wise to have a second set of eyes to assess your progress.
Additionally, always have an eye out for what other option traders are doing. Although you should remain focused on your specific plans, finding out about others can help you tweak a few things here and there.
Not Understanding Risks and Rewards.
Not understanding the underlying concept of risk and reward will ultimately lead to disaster. Some who experience major financial losses early on in their trading careers might end up fearing risk. This makes them less open to legitimately good opportunities. Instead, they hold on to options with minimal returns just because they are less risky to trade. Eventually, such people wouldn’t achieve much financially because reward is often closely tied to risks.
On the other hand, some traders focus too much on rewards and end up giving little concern to risk. It may actually go well for some time but the good run is bound to come to an end at some point.
Understanding the concepts of risks and rewards will save you from the downfall of pushing your position until you lose.
It’s always wise to know when to stop taking trades. If you’re up 40K and think you could be up 80K, stop yourself and look at the risk too. Thinking only of the 80K reward would only make you blind to the risk involved in getting there. As you very well know (at least you should), every reward has some risks attached to it. And often, higher rewards have higher risks.
Can you relate to some of the mistakes described on today’s blog? Feel free to share in the comments how you deal with them.
About The Author.
Kirk Du Plessis.
Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D. C., he’s a Full-time Options Trader and Real Estate Investor.
He’s been interviewed on dozens of investing websites/podcasts and he’s been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.
I'm sure today's wild market ride has tested some emotions out there? Mine included some some crude oil trades are that are tying up way too much margin.
Just curious, how does becoming an options trader make one an entrepreneur, if that’s possible?
Can you elaborate?
I kept coming across the idea through books to treat trading like a business.
I’m just trying to find the connection between being a trader and an entrepreneur…
Gotcha – I think there are many things that we could cover but the key for me is that you are committed long-term. For example, if you opened a new business (store, consulting practice, etc.) you wouldn’t open the doors for 2 months then suddenly close right? You’d work at it each day and be committed. That’s how you have to treat trading – it’s a long-term commitment that you need to work at if you really want to be successful.
An entrepreneur is some who starts businesses and a options trader is someone who buys and sells option contacts.
Can You Get Rich Trading Options.
Maybe you’ve been trading straight futures or just buying stocks but want to know can you get rich trading options or how can I get rich trading options. Everyone who has ever traded options was a beginning options trader at one point.
Did you know that you can make more money on many trades using options than you can by using a straight futures contract or by just buying or shorting a stock? If you don’t believe me, I’m going to prove it to you.
After you see that you can make just a much, or more, money using option strategies and even have less risk sometimes you will wonder why no one has told you about this before.
How many types of options are there? Just two, Puts and Calls, but there are dozens of ways to use them either alone, together, or in combination with a futures or stock positions.
In this article, I’m not going to discuss all the different option strategies you can use but rather I’m just going to show you why you should trade options along with what you are currently doing.
Remember I said there are only types of options? Let’s take a look at each one of them.
What is a Call Option.
If you purchase a Call option you have the right, but not the obligation to be long a market or stock at a certain price, the strike price, on a before a certain date, the expiration date. Simple? You buy a Call when you think the price is going up.
What is a Put Option.
If you purchase a Put option you have the right, but not the obligation to be short a market or stock at a certain price, the strike price, on a before a certain date, the expiration date. It’s just the opposite of a Call option. You buy a Put when you think the market is going down.
The actual definition is simple enough but you have to know which option strike price if the right one to buy, how many days should an option have left before it expires and how to price an option to know if you are paying a fair price for it. These are just a few of the questions you need to understand to become successful at trading options.
True Story that Anyone Can Get Rich Trading Options.
Learning to trade is not rocket science which reminds me of a funny story I’ll share with you. I was doing seminar in Canada a few years back and during my short introduction about myself I told everyone that learning to trade futures and options was not rocket science and that anyone with average intelligence (hopefully that included me), a desire to learn and is teachable can learn to make a living trading futures and options. Please notice two important words I used, desire and teachable which is much more important than intelligence. I’ve seen some really smart people fail and some really average people become successful traders.
At my seminars everyone wants to know what kind of people trade futures so I go around the room and ask people what they do for a living, are they trading, how are they doing etc.
I got the typical answers; a farmer, a truck driver, a teacher, an accountant, a stay at home mom, a doctor and then I ask the next man what he did and he kind of blushed and ask if it was really important. I told him that it was not really important but I was asking only because I thought it would be interesting for everyone in the room to get to know each other. Then he told me he was a rocket scientist! I thought it was humorous and told him that even a rocket scientist could learn to trade. Everyone, including him, laughed.
Can You Get Rich Trading Options - Yes, Here's How:
All I’ve mentioned so far is “buying” options. Did you think about the fact that it takes someone to sell you an option before you can buy it? Of course buying an options requires someone to sell you that option. Common Sense; right?
What risk do you have if you buy an option? The only risk you have is the amount of money, known as premium, that you paid for the option. You also have basically unlimited reward potential too. So you might be wondering why would anyone want to sell an option? It’s because they collect a premium from you (the buyer) for taking that risk. It’s the same reason an insurance company sells you a home owners policy; because you pay them a premium for it and they feel that the odds are on their side and over time they will collect more premiums than they have to pay out in claims. This is the same reason why someone sells options.
Now selling options has predefined rewards (premiums collected from the buyer) and unlimited risk and buying options has limited risk (what you paid for it) and unlimited reward potential.
So David, why would anyone in their right mind sell you an option? It’s for the same reason the insurance company sold you a policy. Are your wheels turning yet? I hope so. But there is a big question you need to ask; how many options expire worthless where the seller gets to keep all the premium? I’ve heard the term 80% used a lot and that’s probably pretty accurate. Should a new trader sell options? Short answer is no, at least not at first. You have to understand the “creature” really well first. However, I will say that you can control your risk when selling options but that is going to be covered later in another article.
On the following chart, I’m saying that we entered the market just below the current day’s low on a short futures contract and had a target to get it at the lows of February 11 th which is the most current major low. As you can see the risk is $1,990.00 and the reward is $3,250.00 which is a reward of 61% ($1,990 / $3.250.00). Not a bad trade if it works like we think it will.
Now I’m going to buy a 125.00 Out of The Money (OTM) Put option for $1,030.00 which is about half the risk I would be taking on the short futures contract.
Look at the chart below and you will see at this point it’s about an even race. The short futures position is up $2,600 on a $1,900.00 risk or 135% and the Put has now made $1,410.00 or 136% of the risk taken. Not a huge difference.
However, what would it look like if on the same day I purchased the Put option I had also SOLD a 132.000 call and collected $630.00 in Premium? Then the cost of our Put we bought, also called the short Put, would only cost $500.00 ($1,130.00 - $630.00 that I got from selling the Call, also called the short Call). So my net cost is now only $500.00 ($1,130.00 - $630.00). See the chart below.
Now, I’ve played the chart forward the to the same date in time. Obviously I would have made the same $2,600.00 or 136% on the short futures position but how much did I make on the options? Good question.
On the 132.000 Call I sold, the short Call, I made $460.00 so far because it’s gone down in value which is a profit for me and I’ve of course still made the same $1,410.00 on the Put Option I purchased, the Short Put. So I made an extra $460.00, not a real big deal or is it. THINK………………………. What did I pay to put the options trade on? Remember I only paid $500.00 net because I sold the Call to help puy for the Put I purchased. So I made $1,410.00 + $460.00 or $1,870.00.
The big difference is the percent of profit I made $1,877.00 / 500.00 = 375%.
If course it did not come without risk, but not a lot more risk. If the market had started to rally I would have lost money on the Put I purchased AND the call I sold. Of course the same could be said about a short futures position too. I would have had a risk of $1,900.00 on the short futures position so I could have had a “mental order” in that if the Options (both the Put and the Call) went against me $1,900.00, I would have gotten out. So the risk would have been the same. Unless something drastic happened and the price took off like a rocket right after I got in I could have controled the risk to be about the same as the futures contract woud have been.
This is just one way to trade options. There are dozens of them discussed in my course as well as in some of the following articles. You can also watch the video I did about this strategy below.
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* Testimonials are not a guarantee of future success. All information is for educational use only and is not investment advice. Trading financial instruments, including Stocks, Futures, Forex or Options on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in any of these financial instruments you should carefully consider your investment objectives, level of experience, and risk appetite. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. The possibility exists that you could sustain losses exceeding your initial investment. You should be aware of all the risks associated with trading and seek advice from an independent financial adviser if you have any doubts. Past performance, whether actual or hypothetical, is not necessarily indicative of future results. All depictions of trades whether by video or image are for illustrative purposes only and not a recommendation to buy or sell any particular financial instrument and do not factor in trading costs in trading examples due to varying commission and fees among traders. The impact on market prices due to seasonal, market cycles or news events may already be reflected in the price. See full risk disclosure. See full risk disclosure.
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Can Forex Trading Make You Rich?
Can forex trading make you rich? Although our instinctive reaction to that question would be an unequivocal "No,” we should qualify that response. Forex trading may make you rich if you are a hedge fund with deep pockets or an unusually skilled currency trader. But for the average retail trader, rather than being an easy road to riches, forex trading can be a rocky highway to enormous losses and potential penury.
But first, the stats. A Bloomberg article in November 2014 noted that based on reports to their clients by two of the biggest publicly traded forex companies – Gain Capital Holdings Inc. (GCAP) and FXCM Inc. (FXCM) – 68% of investors had a net loss from trading currencies in each of the past four quarters. While this could be interpreted to mean that about one in three traders does not lose money trading currencies, that's not the same as getting rich trading forex.
Note that those numbers were cited just two months before an unexpected seismic shock in the currency markets highlighted the risks of forex trading by retail investors. On January 15, 2015, the Swiss National Bank abandoned the Swiss franc's cap of 1.20 against the euro that it had in place for three years. As a result, the Swiss franc soared as much as 41% against the euro and 38% versus the U. S. dollar on that day.
The surprise move inflicted losses running into the hundreds of millions of dollars on innumerable participants in forex trading, from small retail investors to large banks. Losses in retail trading accounts wiped out the capital of at least three brokerages, rendering them insolvent, and took FXCM, then the largest retail forex brokerage in the United States, to the verge of bankruptcy.
Here then, are seven reasons why the odds are stacked against the retail trader who wants to get rich through forex trading.
Excessive Leverage : Although currencies can be volatile, violent gyrations like that of the aforementioned Swiss franc are not that common. For example, a substantial move that takes the euro from 1.20 to 1.10 versus the USD over a week is still a change of less than 10%. Stocks, on the other hand, can easily trade up or down 20% or more in a single day. But the allure of forex trading lies in the huge leverage provided by forex brokerages, which can magnify gains (and losses).
A trader who shorts EUR 5,000 at 1.20 to the USD and then covers the short position at 1.10 would make a tidy profit of $500 or 8.33%. If the trader used the maximum leverage of 50:1 permitted in the U. S. for trading the euro, ignoring trading costs and commissions, the potential profit would have been $25,000, or 416.67%. (For an explanation of how to calculate forex P/L, see How leverage is used in forex trading.)
Of course, had the trader been long euro at 1.20, used 50:1 leverage, and exited the trade at 1.10 to the USD, the potential loss would have been $25,000. In some overseas jurisdictions, leverage can be as much as 200:1 or even higher. Because excessive leverage is the single-biggest risk factor in retail forex trading, regulators in a number of nations are clamping down on it.
Asymmetric Risk to Reward : Seasoned forex traders keep their losses small and offset these with sizeable gains when their currency call proves to be correct. Most retail traders, however, do it the other way around, making small profits on a number of positions but then holding on to a losing trade for too long and incurring a substantial loss. This can also result in losing more than your initial investment. Platform or System Malfunction : Imagine your plight if you have a large position and are unable to close a trade because of a platform malfunction or system failure, which could be anything from a power outage to an Internet overload or computer crash. This category would also include exceptionally volatile times when orders such as stop-losses do not work. For instance, many traders had tight stop-losses in place on their short Swiss franc positions before the currency surged on January 15, 2015. However, these proved ineffective because liquidity dried up even as everyone stampeded to close his or her short franc positions. No Information Edge : The biggest forex trading banks have massive trading operations that are plugged into the currency world and have an information edge (for example, commercial forex flows and covert government intervention) that is not available to the retail trader. Currency Volatility : Recall the Swiss franc example. High degrees of leverage mean that trading capital can be depleted very quickly during periods of unusual currency volatility such as that witnessed in the first half of 2015. OTC Market : The forex market is an over-the-counter market that is not centralized and regulated like the futures market. This means that forex trades are not guaranteed by a clearing organization, which gives rise to counterparty risk. Fraud and Market Manipulation : There have been occasional cases of fraud in the forex market, such as that of Secure Investment, which disappeared with more than $1 billion of investor funds in 2014. Market manipulation of forex rates has also been rampant and has involved some of the biggest players. (For more, see How the forex "fix" may be rigged.) In May 2015, four major banks were fined nearly $6 billion for attempting to manipulate exchange rates between 2007 and 2013, bringing total fines levied on seven banks to over $10 billion.
If you still want to try your hand at forex trading, it would be prudent to use a few safeguards: limit your leverage, keep tight stop-losses and use a reputable forex brokerage. Although the odds are still stacked against you, at least these measures may help you level the playing field to some extent.
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