If you’ve stumbled upon a Forex advertisement that promises that you can make money, even with a small investment, from your cell phone, you’re not alone. Forex, or foreign exchange, is the market where foreign currencies are traded and it can be marketed as an easy way to get started in trading due to the low entry barriers and the availability of foreign exchange trading nearly 24/7.
But don’t mention that forex trading is actually hard to do profitably and that much of the risk is glossed over in the marketing of forex trading. This is not to be a deterrent, but to provide you with a realistic view before investing any funds.
What is Forex Trading, anyway? So what exactly is Forex Trading, anyway?
Forex trading basically involves taking a guess as to whether the value of one currency will increase or decrease with respect to another. If you believe that one currency will become more valuable than another, then you purchase that pair. However, if it hovers at a lower number, they are making a loss on the deal.
The forex market is massive and trades nearly around the clock during various trading sessions all over the world, hence the appeal of this market, there is always a market somewhere. A wide variety of reasons cause currency values to fluctuate; interest rate announcements, economic data releases, politics, and market sentiment can all have an impact, and they can combine to create a large effect.
Why It’s Marketed So Heavily to Beginners
Forex brokers tend to have a minimum trading amount, and a number of them provide something known as leverage which enables you to have a larger trade than your account balance would permit. The small account and big leverage can be seen as a chance to generate outsized returns from a small starting point.
The reality is that leverage can boost profits. What’s equally true – and not mentioned as much – is that leverage magnifies losses just as it magnifies gains. What would be a short-term price swing for a non-leveraged account can have a devastating effect on a leveraged one in a short amount of time.
The Part Most Beginners Underestimate
The value of currencies fluctuates frequently and these changes can be sudden and sharp, particularly around key economic announcements. Even a small price change that moves against your trade can result in a kind of margin call – your broker closes your trade automatically because your account does not have sufficient funds to keep the trade.
It is not uncommon to be “right” on a certain currency pair’s longer-term trend, and to lose all of your position simply because the price went the opposite way in the short term – before swapping into the trend. An early and an incorrect message on your balance can be the same thing.
Why Most Retail Traders Lose Money
This isn’t a guess, it’s something that’s been documented repeatedly. Most individual retail Forex traders lose money in the long-term and in many countries retailers are mandated to warn prospective customers about this fact. These seem to be pretty similar: the leverage that makes losses bigger, the emotional decision making when competing under pressure, the absence of a proven strategy and the failure to realize that the price may move quite a bit in the short term even if the underlying analysis seems sound.
None of this indicates that it’s impossible to trade forex profitably. It doesn’t just mean that those who do engage in it take it seriously, that they do it seriously, and not something that they do as a hobby with a little money and a YouTube video.
If You Still Want to Learn
However, if you are really interested in forex, the now responsible way is to educate yourself before investing. There are a lot of brokers that give demo accounts which enable you to practice making use of pretend money within the live marketplace. If you spend real money over weeks and months, and record your trades, it’s much more accurate than taking a shot in the dark with a live account.
Starting with the money that you would be willing to lose completely, and not trading with too much leverage until you feel that you’ve learned enough to do so safely, means you will have a much better chance of not losing all your money in a few bad weeks.
A Healthier Way to Think About It
Be honest about what you want! If the appeal is the prospect of quick, thrilling profits, then forex trading is more apt to be a game of chance than an investment and should be treated as such.
If it’s a real interest in markets and economics, then that’s a good first step, but it’s a good idea to also have realistic expectations: people who regard the forex as a “get rich quick” scheme end up losing money, and those who see it as a serious business spend a long time learning before they start risking large amounts of cash.
The Bottom Line
If forex trading itself is not a scam, then its marketing to newbies does leave out the important aspects: Leverage works both ways, price movements may be severe over short periods even as they are favorable over the long haul, and ultimately, most retail traders lose money. If you are curious, try out education and demo accounts and once you start trading with real money, try to gamble it out rather than try to keep it.
Disclaimer:
This article is intended to provide general information only and should not be regarded as financial advice. Trading Forex can be risky and not for everyone. If you need advice tailored to your circumstances, seek professional financial advice.
