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Why do people say the forex market is risky when it only fluctuates by fractions of a percent every day? How do traders make a profit with these small price moves?

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when it only fluctuates by fractions of a percent every day?

It does? This is called argument of ignorance because... see... occasioanlly it is known to be quite volatile. Look at CHF (swiss Frank) vs. EUR (Euro) over more than a couple of months - there was one day a 40% JUMP.

How do traders make a profit with these small price moves?

Go to google.com, look up the term "Leverage". Basically by using credit to move large amounts of money with relatively small a ccounts.

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when it only fluctuates by fractions of a percent every day

Not entirely true and not complete either.

First of all the size of daily FX trading is ~ $5-6 trillion(not real cash but on margin/leverage). Traders try to make money in price changes up to 8-9 decimal places. Now you can realize why the size of the market is so huge. It is risky because you need to put in huge sums of money to make any appreciable profit. And FX markets can turn just like that depending on comments coming from the authorities or people in the market which can make currencies go down and up in a matter of moments, which can make your money disappear or leave you sitting on huge losses(gains).

A trader at my previous employer made a cool $20 million by taking a contrarian bet on the Swiss Franc, while everyone lost money.

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Short version:

I have $10,000 in my Forex account. My account is worth $10,000.

I borrow $2,000,000 worth of GBP, using the GBP as collateral.

I sell the GBP for EUR, now using the EUR as collateral.

I now have $10,000, $2,000,000 worth of EUR, and owe $2,000,000 worth of GBP. My account is still worth $10,000.

Now, say over the weekend (when I can't trade) the EUR goes down by 0.2% against USD and the GBP goes up 0.2% against USD.

I now have $10,000, $1,996,000 worth of EUR, and owe $2,004,000 worth of GBP. My $10,000 is now $2,000.

In one weekend, I have lost 80% of my account's value.

Now imagine something like this happening the day the UK voted to leave the EU (in EUR/GBP) or the day Trump was elected President (in USD/MXN).

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    Then don't leverage so much – MammothActuary Jul 31 '18 at 21:37
  • Then how do you make a profit with those small price moves? – David Schwartz Jul 31 '18 at 21:37
  • any investment would be risky with that much leverage but forex trading itself is not risky – MammothActuary Aug 1 '18 at 0:11
  • Yes and no. It's true that any investment would be risky with that much leverage. But it is not true that forex trading itself is not risky. Forex trading itself is risky because, due to the usually small price movements, you have to use significant leverage to get any reasonable return. As you pointed out, any investment with that much leverage would be risky. Your question refutes your comment. – David Schwartz Aug 1 '18 at 0:48

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