Forex Risk Warning
This is one of those articles that can cause a lot of discussion on the Internet. The reason for that is I will be discussing something that a lot of Forex traders don’t want to admit: Forex trading can be quite risky. I believe that is a situation that far too few traders pay attention to, as it’s natural for people to fantasize about all of the money they’ll be raking in while sitting on the beach, using either a smart phone or a laptop. The reality about trading currencies is quite different though, even if you don’t want to hear it.
Some hard truths
Some hard truths about trading currency that people don’t want to hear is that beyond the leverage, there isn’t much difference between trading currencies, commodities, or even stocks. While I’m aware of the fact that there are some subtle nuances, at the end of the day you are either trying to buy at an uptrend or sell in a downtrend. (Unless of course you're a counter trend trader, but I bet very few are successful at that style.) So having said that, the only real difference between Forex trading and many other types of trading is the massive amounts of leverage that are available. Therein lies the rub.
It’s about marketing
Forex trading can be extraordinarily dangerous if you don’t know what you’re doing. The ability to trade as much as 1000 times the amount of money you put up is absolutely insane. Nothing good comes of these extraordinarily high leverage levels, although marketing professionals would have you believe different. Put it this way: “How many times have you seen a Forex advert featuring a private jet, exotic car, or sailboat?”
It astonishes me how many people believe that they are going to become wealthy with a small trading account. It’s not that you can’t grow a trading account over the longer-term, but most people to start that patient. They put $1000 into an account, looking to make $1 million by the time it’s all said and done. They don’t understand that some of the best traders in the world average 20% a year. On a $1000 account that’s only $200. Being undercapitalized is without a doubt one of the biggest disadvantages that retail traders face. It’s difficult to get excited about making $200 over the course of the year.
There is no secret formula
The reality is there is no secret formula when it comes to making money in the Forex world. What I mean by this is you will undoubtedly come across the idea of some type of magical formula or system, or even indicator that can make you rich. On top of that, somebody will be more than willing to sell it to you for $99! Can you imagine the generosity of someone who makes that kind of money to give you these powerful tools for just a few dollars? Or, is it more likely that they are trying to sell you something to make money rather than use it for their own account? The reality is that the most profitable advice that people can give you is to simply dial back the leverage and use psychological discipline, something that most people fail miserably at. In fact, a serious argument can be made for the system being somewhat irrelevant, as even some of the most basic trading systems have been proven to make money over the long run. The question then becomes whether or not you as a person can psychologically take trading.
It’s not all bad news
I’ll be honest here: I’m not extraordinarily wealthy or anything like that. I haven’t made millions trading, but I have made a reasonable amount of money. However, beyond making a few thousand dollars here and there, I have gained much more than monetary value trading Forex. One of the biggest surprises for traders to stick with it is just how much it opens up your eyes to the rest of the world. You begin to look at the psychological aspects of everything, and some of the lessons that you will learn far outweigh anything that you can gain in a bank account.
I think at this point the most important thing to take away from this article is that Forex should be thought of more or less as a puzzle. It’s nothing more, nothing less. There’s nothing exotic about trading Forex in relation to other markets that you can be involved with. At the end of the day, you aren’t taking delivery of €100,000, so what’s the difference if you trade the Euro, or you trade Walmart? However, having the ability to use so much leverage can teach you lessons about becoming a better trader in other markets as well.
As soon as you realize just how deadly leverage can be, as well as helpful, you then begin to learn how to become a true trader. In fact, some of the best traders I know started out in Forex and then got involved in other markets such as bonds or oil. At the end of the day, you learn market dynamics with a very small deposit, and several life lessons. Beyond that, if you do learn these lessons, you can make a strong return on whatever money you do have.