| How can forex trading make you poor or rich |
If you have ever traded on the stock market, one of the things you should be looking for should be a company with a strong and profitable history. Indeed Warren Buffet, investor extraordinaire and the man that reputedly pocketed over 2 billion dollars trading forex for his company Berkshire hathaway, has said It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. You should make sure that the company that you put your money in has been around long enough and is stable enough that its not going anywhere.
Now imagine if a company had over 300 million employees, was over 200 years old. Not big enough, how about if it had over 700 million employees.
Thats exactly what you get when you invest in Forex since the company that you are buying into is the national economy of a country. When you purchase USD you are essentially buying shares in the United States of America. When you buy Euro, you are buying into the European economy. This is why trading in forex can be one of the safest investments you can make.
Over the last 10 years the price of USD vs GBP has ranged from around 1.35 to 2.0. That is a range of just over 30%. The difference between the best times and worst times of the last 10 years was only 30%. From the highs and lows dot com boom and bust through the highs and lows of the real estate boom and bust the price was affected by only 30%. lf we were talking about a company who had 10 years as rocky as the ones we just experienced you would be forgiven for thinking the company would have gone bust.
What does this mean for you?
Well you now you have a handful of very stable, very large companies (read currencies) to invest in. Not only that, there is a wealth of regular, freely available information published to help you trade. You’d be crazy not to
So why is it so risky?
In a word, Leverage. Also known as trading on margin. Leverage allows you to invest more money that you actually have. So instead of investing 10k USD you can invest 10 times that (or more). This means that your profits are also increased by 10 times but it also means your losses are increased by 10 times which is how you can lose all your money invested (and more if your broker doesn’t have an automatic margin call policy).
If youre wondering why the broker would let you do this its because the way brokers make money is everytime you buy or sell something, whether it be shares or currency, they take a tiny fraction of a percent. So if you buy or sell 10,000 dollars the broker probably takes around 10 dollars. So the broker wants you to trade higher amounts and as frequently as possible. Now if you buy shares in a normal company and that company takes a huge hit, it might go bust however since the market is so stable even in the extremely unlikely event, that over the last 10 years you invested at the highest price of the dollar and the watched the price of USD just fall and fall to the lowest point it had been you would have only lost 30% of your investment so the brokers know you only need enough money in your account to cover your losses, which without leverage are always much smaller than your invested amount.
So how can the forex market make you rich? Slowly, thats how. Dont get greedy and dont over leverage. Despite the fact that brokers let you invest more up 200 times what you have deposited, its generally a very bad idea to invest more than 3-4 times what you have in your account. The amount you leverage will decide whether you get very rich slowly or get very poor very quickly. But even going very slowly it is possible to increase your investment by 30-50% over the course of a year.
Try it out for yourself by signing up to a free demo account here
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
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