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As of April 2021, forex has a daily market capitalization of more than US$6 trillion. This figure has turned forex to the largest financial market which therefore becomes the attraction to an increasing number of speculative traders. However, various speculators express their concerns over the validity of forex trading and wonder whether venturing on foreign currencies is a wise option. Let’s look through this article, you will easily find the answer for how reliable foreign exchange transactions are.
Introduction to Forex
Forex is undoubtedly the most liquid market that enables traders to conduct currency transactions 24 hours a day in a decentralized and over-the-counter (OTC) system. The forex market allows direct transactions between parties without the intervention of clearinghouse and formal exchanges. This becomes a good motive for retail traders to choose forex as the favored investment channel.
Previously, only high-net-worth individuals who had a strong association with banks were empowered to transact foreign currencies. However, the advent of computers and other advanced technologies has shifted the way forex works and therefore diversified its participants. Retail traders now can easily access the market by opening a position on a customized trading platform of a legitimate broker.
Besides, traders are encouraged to join the market on the grounds of the leverage tool which entitles participants to magnify their trading capital by borrowing money from brokers without any interest rates. Compared to other financial markets such as stocks or bonds, forex offers a much higher leverage ratio and thus allows traders to start with low investment. For example, should a trader initially finance his account with US$100 and augment that deposit up to 100 times, the total capital is then US$10,000.
Inevitably, those virtues have rendered forex accessible and motivated numerous speculative traders to invest in this market. Even a bunch of individuals decide to quit their current job and switch to full-time retail traders due to the so-called high probability of financial returns. Still, is it truly a sensible option all the time? This is because of the ramifications involved in forex trading, apart from its perceived benefits. In other words, trading foreign currencies can either make traders wealthy overnight or burn all their investments in a second.
Is Forex Reliable?
It depends on how traders conduct transactions in the market. In nature, trading foreign currencies is not illegal nor prohibited in many countries. Though, an increasing number of losing trades recorded in speculative trading over decades have sounded the global alert about the reliability of forex trades. Reports have shown that more than 90% of retail traders lost money after transactions whilst banking institutions, brokers and other financial companies profited from those trades. Accordingly, many governments obliged those organizations to halt relevant services before the situation became worse.
This, coupled with the loose administration of the currency market, has made forex criticized as nothing more than “gambling” in which players only bet on the price movements and risk losing money in hopes of financial returns. Nevertheless, this is not totally true. Forex itself cannot be to blame for the whole financial collapse of individuals. Evidence states that various investors still generate high incomes from trading forex and claim this is a reliable investment channel. This success comes from their brilliant performance in the market.
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How Reliable is Forex Trading?
When it comes to forex trading, some critics doubt its credibility. Even novice investors hesitate to enter the market amidst unconfirmed rumors of its legitimacy. Therefore, retail traders pose the general question of how reliable forex trading is. To address this common issue, you can break down the whole question into smaller ones as follows.
Is forex trading regulated?
The nature of the forex market is decentralized, as earlier mentioned. Accordingly, all trading activities of retail traders in an OTC market are not under the supervision of any formal exchange. Forex investors are given considerable latitude in funding their account, trading with any position sizes and order types, and choosing the preferred leverage ratio. No governments nor competent authorities regulate how much traders must deposit to their accounts as the minimum or which trade setup they should have.
For instance, by depositing merely US$10 into a trading account and leveraging that small investment up to 1000 times, you can have a total trading capital of US$10,000. This amount is sufficient to open a mini lot (0.1 lot) which one-pip change is equivalent to US$1. It does not matter provided that you have the first winning trades and reap profits. What if you confront a string of losing trades though? Only a 10-pip movement reduces your account balance to zero and consequently compels you to stay out of the market unless you fund your account immediately to ensure the margin requirements of a broker.
Numerous people have made a similar trading mistake. The absence of strict regulations and official management, coupled with the lack of the trader’s consideration, has resulted in the massive failure in forex trading.
In the retail forex market, furthermore, traders usually engage as speculators who purchase and hold the foreign currency with hopes for an increase in its value so that they can earn profits from the difference between the current market value and the future price. Should a trader realize a possible rise in the base currency’s price against the quote one, he or she will open a long position to buy the currency pair. Conversely, the trader can go short on the pair when expecting the pair to depreciate (decrease) in value.
Speculative trading is deemed as riskier than other trading types (i.e. hedging, arbitraging, and investing) and has become internationally widespread since policies of floating exchange rates and deregulation strategies were enacted. Although several governments have imposed laws to buffer the adverse impacts of speculation, no further actions can tightly administer speculative trading and minimize its unexpected monetary risks. Therefore, currency speculation in the forex market is generally not so stringently monitored as trading activities in other financial markets.
Do forex brokers scam?
Foreign exchange trading is legal. In addition, many forex brokerages are now under the legislation of local authorities and international organizations to avoid money-laundering activities and any harm to their clients and even the national economy. However, the deregulated nature of the forex market has become a weakness exploited by various scammers to do fraud and deceit acts.
Typically, those brokers can exaggerate the market’s potential benefits to tempt novice traders to unprofitable trades. Today, you can easily spot misleading advertisements of how forex trading can make you rich overnight with low capital but they less mention unprecedented demerits of the market. This distinguishes untrusted brokers with regulated ones who always warn their clients about serious risks of forex trading.
Even some scam brokerages refuse their customer’s permission to withdraw profits from trading accounts. Unfortunately, not all countries pass laws to protect their residents in such a case. Therefore, when trading in the retail forex market, not only do traders bear risks induced by forex trading, but they also face unanticipated threats from fraudulent brokerage companies.
Does trading foreign currencies bring in proceeds reliably?
This question references the persistence in making profits. The answer can be yes if traders know what they are doing on the market and then trade sensibly. According to reports of various European brokerages, more than 70% of their clients suffer loss from foreign exchange transactions. The main culprit behind this result is because retail traders have little or no understanding of the market and fail to manage risks.
Apparently, many are poorly educated about such forex-related basics as factors behind the market movements (e.g. supply and demand), deposits (e.g. proper amounts advisably put in trading accounts to make their transactions more flexible), leverage (e.g. the low leverage ratio encouraged by experienced traders and financial experts), the position sizes and types of orders. Besides, they do not equip themselves with how to fundamentally analyze major news or observe the price action. Consequently, both incomplete preparations and improper trading strategies make them fail to earn profits.
Many success stories out there have proven that forex trading can provide traders with profits reliably. However, a profitable trading plan hardly ensures the long-term success of traders unless they continuously adapt themselves to changes or new features of the market. Even it is unsurprising that any social or political turmoil can negatively affect all traders and result in a massive failure, or worse, economic downturn. Therefore, forex is always a profitable business.
Answering the above questions indicate that forex trading is reliable, but just to some extent. In comparison to stock or bond markets, there are fewer provisions to effectively monitor forex trading activities and protect retail traders from repercussions of the market. Transacting foreign currencies can become dependable provided that investors grasp how to control unexpected risks, develop a profitable trading strategy and periodically revise to fit the plan for the market trends. Importantly, they should pay attention to choosing a legitimate broker as well. Good preparations will partially contribute to their success in the market.
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