Most people looking to make a little extra cash discover forex and some point in their investing careers. They discover that it is possible to generate profits simply by trading currencies. Unfortunately, many people get discouraged. They believe that they either need a lot of capital, a lot of experience, or both.
In this post, we’re here to tell you that that’s not true. You can start a successful forex account with relatively little money and make considerable returns. For instance, with $3,000 of capital at risk, you can make $50,000 per year. Risking $5,000 may allow you to generate $100,000 per year.
So, how can forex trading make you rich?
Take Advantage Of One-Off Events
In recent years, we have seen a host of one-off events that have led to gigantic swings in the country’s exchange rates. For instance, when the UK left the EU, the pound plummeted, providing massive profit opportunities for traders who bought it when it was high.
Similarly, the American dollar rebounded significantly during the coronavirus-induced stock market crash of March 2020. Investors fled to the US currency, seeing it as a safe haven during uncertain times. Many other currencies around the world plummeted.
There are examples of this happening throughout history, with many smaller events occurring daily. Good forex traders understand the landscape and predict what is going to happen to major currencies following market news.
Another benefit of forex trading is the fact that you can use leverage. In other words, if you spot a profitable trade, you can borrow money to fulfill it.
The amount of money you can borrow is enormous. In the US, you are allowed to lever up in a 50:1 ratio. That means that you can borrow up to $50 for every $1 you own.
When trading, this makes a big difference to your profitability. For instance, if you short a currency with your own capital valued at $3,000, you could make a $500 profit if it falls by 8.33 percent. However, if you lever up to the maximum, you could make $25,000 on the same trade.
Depending on your jurisdiction and forex trading hours in your location, you may be able to borrow even more. Some regions allow leverage ratios of 200:1.
As a forex trader, you often have an information edge versus the rest of the market. You’re able to see things before other participants can, allowing you to make shrewd trade moves.
For instance, if you have commercial or government contacts, you may be able to short currency bad news before other market participants do the same, increasing your profits.
Lastly, many traders make large profits on the back of platform malfunctions and system failures. When platforms fail, most traders lose the ability to buy and sell. Spotting these failures allows you to make trades first before other people, allowing you to slurp up all the profits ahead of the competition.