Forex (foreign exchange) trading is often advertised as a financial strategy that can help you generate life-changing wealth. Social media will have you believe that if you start trading currencies, you’ll be wearing a Rolex and driving a Lambo in no time.
In reality though, forex trading is quite hard. If you’re looking to make big money in the financial markets, I think there are much easier strategies to pursue.
Most forex traders lose money
While some forex traders do make good returns trading currencies, the majority lose money. How do I know this? Forex brokers admit it!
For example, on the forex.com website, it says that 69% of its retail investor accounts lose money. Meanwhile, on the fxcm.com website, it says that 70% of its retail investor accounts lose money. In other words, seven out of 10 people trading forex on these platforms are losing money (among beginners it’s probably actually closer to nine out of 10).
Why do so many forex traders lose out? Well, one reason is that the currency markets are notoriously volatile. This means that to be successful, you need to have a really disciplined approach and be able to separate your emotions from your trading strategy. A lot of people just don’t have the right temperament
Ultimately, to make consistent profits from the foreign exchange markets, it takes years of practice. Most people give up before they get there.
An easier way to make big money
If your goal is to make big money in the financial markets, I would forget about forex trading and instead look at investing in smaller growth companies.
As small companies grow and become more profitable, their share prices tend to rise as well. This means that if you pick the right stocks, you could potentially turn £1k into £2k, £5k, or even £20k without really doing much.
Here are some examples. In early 2015, shares in online fashion retailer Boohoo Group were trading for just 25p. Today, however, the stock is trading at over 280p, meaning that if you had invested £1k in the company in early 2015, it would now be worth around £11k. Similarly, five years ago shares in vehicle-testing group AB Dynamics were trading for around 165p. Recently, however, those shares were trading above 2,800p, meaning that you could have turned £1k into around £17k in the space of less than five years.
Of course, not every smaller company performs like this. Just look at Sirius Minerals. It has lost around 70% of its value over the last five years. As with any financial strategy, it’s important to be aware of the risks.
Yet if you focus on profitable businesses that are growing quickly, diversify your money over a number of different companies in different industries, and have patience, you have a good chance of making money, in my view.
If you’re looking to learn more about making money from smaller companies, you’ve come to the right place.
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Edward Sheldon owns shares in Boohoo Group. The Motley Fool UK has recommended AB Dynamics and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.