Quite often, we find stories in which Forex traders claim to have made a fortune in a short span of time, and lead an uber-wealthy life. However, most of those internet stories end with a link to open an account with some Forex broker or to buy a surefire trading system. While common sense will dictate us to brush away such stories as marketing gimmicks, flashes of the read story will divert our thoughts during the following days. The yearning to lead a prosperous life will often lure individuals to open an FX trading account soon. However, the immediate query that will come up in one’s mind after reading such a story is whether it is really possible to become rich by trading currencies. We shall try to arrive at a clear answer in this article with necessary justifications.
Before we decide whether a Forex trader can really become rich by trading in the currency market, we need to define what 'rich' means. A person earning $50,000 equivalent in any of the third-world countries could lead a comfortable standard of living. However, the amount is insufficient in the USA and Western Europe and would be classified as middle-class income. Not so long ago, a person would be considered rich if they had at least $1 million surplus cash in the bank account. However, taking into account the effect of inflation, the actual amount required would be higher now.
Notably, a survey conducted by Charles Schwab revealed that a person should have more than $2.40 million to be considered wealthy in the USA. This may vary slightly according to the country a Forex trader lives. However, in our study, we shall use $2.40 million as the minimum amount to be made by a trader to become rich.
Whenever Forex trading is discussed, the topic of becoming rich comes up. Generally, a career in financial trading is taken by those who wish to make themselves rich by taking a bit of risk. It is particularly true in case of currency traders. The foreign exchange market offers unparalleled opportunities to traders. There are practically no restrictions on capital requirements, trading time, and the amount that can be earned. Additionally, the leverage offered by Forex brokers, despite being a double-edged sword, is unmatched. All these facts encourage beginner traders to aim for getting rich quickly. Unlike the world of traditional business and investments, earning money in FX trading does not take much time - significant. That is one of the reasons the topic of wealth generation comes up often while discussing Forex.
It is definitely 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 there is always a risk of losing it all. This brings us the question of the optimal starting capital in a Forex trading account. There are Forex brokers who allow trading even with $1 in the account. Practically, it is not possible to earn meaningful stream of income with such a little amount. Even a seasoned trader may face a series of 5-6 losses in a row. As a rule of thumb, a trader should not lose more than 2% of the capital whenever a stop-loss order gets triggered.
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 as the initial capital. Anything lower than that would just trigger premature stops. The risk of losing the trading account will decrease 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 Herculean 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 easy to grow a trading account quickly with a large initial investment.
Obviously, a trader starting with $2 million trading capital is just a few steps from becoming rich. At the same time, someone starting with $10,000 will have to demonstrate years of profitable trading to get closer to join the ranks of wealthy. Even $100,000 (which was considered a minimum starting amount in Forex before 2000's) would require a lot of time and dedication from a trader to raise the sum up to millions. Therefore, initial capital put forth by a currency trader has considerable impact on the overall chances of becoming rich. However, it is not the only criteria.
To succeed in trading, a trader should have good knowledge of fundamental and technical analysis. Traders should keep themselves up-to-date with latest news, political announcement, and industry developments. Additionally, discipline and patience are must-have virtues.
It should be remembered that currencies can suddenly turn volatile due to untoward incidents. For example, unexpected central bank rate hike or cuts, poor GDP and job data, a terrorist attack, war between two countries, UN sanctions, riots, etc. can create unexpected trend reversals, leading to huge losses or even wipe-out of account. So, a trader can go broke quickly. That’s why professionals advise investing only surplus funds in Forex trading.
The percentage of traders who successfully complete one year, without losing their account, is very small. In most cases, beginner traders lack discipline and do not stick to a well-tested strategy. Furthermore, misuse of leverage is also one of the reasons for the failure of most beginner traders. Therefore, a Forex trader who is well-prepared to introspect and correct trading mistakes, remains disciplined, shows patience, and uses reasonable leverage can definitely become rich by trading in the Forex market in a period of time dependent on the initial capital.
Invariably all Forex traders aspire to become rich. However, only a handful of traders succeed in their endeavor. Similar to any other profession, dedication and discipline are a must to prosper by trading in the currency market.
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