You've probably heard stories about people making a lot of money day trading on various markets. The internet has made day trading easier than ever before, so it's common for students, like yourself, to consider trading their way out of student debt. In
most cases, they find out quickly most day trading firms require hefty sums of cash upfront — $25,000 to $50,000 or more. But what if there was a way you could get started with only enough cash to equal a month's worth of your current ramen budget on hand?
With Forex trading, that may be possible, but before you jump in head first, you need to know the pros and cons.
What Is Forex?
Forex stands for foreign currency exchange. It's a unique investment market that lets you trade currencies against each other. So instead of buying and selling bits of corporations like you would if you were investing in the stock market, or buying and selling
loans like those investing in bond markets, you flip currency that's starting to lower in value to currency that's increasing in value to steadily increase the value of your investment over time.
Every day, Forex investors with portfolios ranging from a few hundred bucks to hundreds of millions of dollars toss around more than $5 trillion in currency trades, sometimes doubling their investment in a matter of hours.
In fact, more money is traded in the forex market than in any other market - and by a significant margin. This graph shows how it compares to other large markets when it comes to market size.
However, this doesn't mean everyone gets rich quickly with Forex trading. Like with any investment, you stand to lose money too. So it's important to understand exactly how the process works before you get started.
How Does Forex Trading Work?
In 1971, several of the world's major countries came to an agreement to allow people to exchange their currencies. This is why you can directly convert Australian Dollars to U.S. Dollars, which you can then swap for U.K. Pounds or Japanese Yen. There are
12 different Forex trading markets around the world that are open 24-hours per day, five days per week.
The key to making money with Forex trading is to use currency that's starting to drop in value to purchase currency that's starting to increase in value. Basically, you want to buy low and sell high — like you would if you were investing in the stock market.
To do so, you’ll need to be able to accurately predict market movements based on real world events. Major political events can often trigger sudden currency price movements, as evidenced in the graph below.
Here’s another example of how major news stories can impact currency movements. In this case, the value of BRL to USD dropped following the corruption scandal.
Large traders, such as major banks and brokerage firms, often leverage their investments by borrowing money in the falling currency to convert to the rising one. This tactic lets Forex traders push their profits to hundreds of thousands of dollars in a single
trade — at times. However, traders who do this are typically those with deep pockets or major investors like banks and brokerage firms.
Can I Get Rich With Forex Trading?
While the idea seems simple enough — buy low, sell high — you shouldn't assume Forex trading will magically make you rich overnight. It won't. There's no such thing as free money, and even the best Forex traders have losing streaks that cost them the majority
of the capital they've built up.
In theory, you could drop a few hundred bucks into a Forex trading account and leverage it into tens of thousands of dollars before cashing out. But realistically, that doesn't happen. It's a lot more likely, that you start out trading in small increments
— around $5 at time — while you learn the ropes.
If you're serious about Forex trading, it's much more important to learn how you can become profitable consistently before you try to take on larger investments. This way you can limit your risk a bit. Be prepared to spend a lot of time online as you get
used to market behavior and learn how to identify trends, patterns, and how the economic landscape affects different currencies.
The bottom line is, you don't want to look at Forex trading as a way to get rich quickly. Typically, it's those with deep pockets and large accounts that make the most money. So instead, consider Forex trading a long-term investment. Start small, learn the
ropes, and gradually increase your investments over time.
How Can I Trade on Forex Safely?
Forex trading is extremely welcoming to new investors. You don't need tens of thousands of dollars to get started because the market is slightly less regulated than stock and bond markets. This is a good thing because it lets you start out on a student's
budget, if needed, and gives you time to learn the ins and outs of trading without breaking the bank.
However, there's no such thing as safe trading. They don't sell protective gear for your bank account. Any time you invest money, there's a risk — some larger than others — and there's typically a steep learning curve. But in some cases, it's possible to
start with simulated trades before you take the plunge and invest real money. If this is an option, do it. As long as there is plenty of data and feedback given to you on the trades you make, simulated trades are a great way to learn before you invest real
money, which limits your overall risk a lot.
When you do move onto the real markets, be careful when choosing a broker. Some ‘scammy’ brokers will use their position to manipulate the market in order to make a profit, such as through ‘stop loss hunting’, in which they drive the price of an asset low
enough to trigger mass stop-loss sells and profit off the volatility.
When it comes to Forex trading, it doesn't matter how naturally brilliant you are at it. There's always going to be a risk of losing money. So before you jump right in, download the
Forex Hero app from Apple or Google Play to learn more about Forex trading and get started today.