I have no experience whatsoever in Forex but, out of a whim, I’d like some thoughts, more of a confirmation than anything else regarding this theory of mine.
This is the scenario:
- Guy #1, your average Joe, wins 1.000.000 € at the national lottery and his goal is to make a decent, average living just by managing this capital. He thinks about Forex.
- He opens up a trading platform online and, after observing the prices going up and down, invests all 1 million in one single pair with no leverage and the smallest “Take Profit” option (a difference of 0.0001) available.
For convenience’s sake, let’s say “buy” or “sell” are chosen accordingly to the final price of the day before (if at that moment it’s higher than the day before he’ll sell, otherwise he’ll buy).
He thinks “Well, it’s bound to hit that some time around today, I’ll get my 100 bucks and be outta here”.
What will happen and why? Will he bankrupt?
Assume he is trading 10 100k contract Lots so in effect $1,000,000 depending on the pair he is trading in the case of EUR/GBP he will be buying or selling a non-US dollar pair so gains and losses are quoted in GBP. This is also his entire margin requirement (in the absence of leverage).
Each pip move (1/10,000th of a movement in price) is worth $100 to his now exposed $1m or Euros. This of course is once we have deducted any commissions to the broker which may average 2 pips with such funds there will be no spread. so after 3 pips he may well just run with no chance of bankruptcy he would have to see a 10,000 pip reversal for him to be insolvent.
Bruce Kovner the most successful trade says “With enough money one can never loose in currency trading”
Truth is anyone with $1m or euros would consider other investments (more profitable) rather than FX in fact with 1m they would be able to raise another 1m and open a brokerage and start market making I think FDD brokers require only $1m capitalization and FDM require 10m don’t quote me. Market making is far more profitable than trading but that said if he is shy he can easily make a 5% annual return on his investment at 50k per annum.
Or he could be normal and invest in commercial real estate.