Forex trading is a zero sum game; winners make money and losers lose all. In fact, 85% of people lose money in this business that has become wildly popular over the last couple of years. These are real people just like you, and they think that they have found a way to make a lot of money- just like you.
Ultimately, only two in ten people will recoup their investments, and maybe one in ten will go on to be consistently profitable. This raises the question: is there something one should know before trading forex?”
This post answers that question clearly; and also explains those things for the benefit of those who need the money. It is hoped that reading this article can save someone from ruin; and can help people make good financial decisions.
What You Should Know Before Trading Forex
Forex Trading Is Risky
This much has already been mentioned in the introduction, but not sufficiently. Of all the possible ways to profit from price movements of tradable assets, spot forex trading is the riskiest. Compared to stocks, the risk is amplified exponentially because with forex, one is not really buying anything; just a contract with a broker.
With stocks on the other hand, one actually purchases shares in companies, and can be compensated with dividends. If for any reason, heavy losses should occur, the investor may choose to hold on to the stocks, which may recover at a later date.
It is still possible to lose all of one’s money, but that is not such a frequent occurrence.
Forex Trading Is Addictive
It creates a rush of excitement; you click something; and then a few minutes later you make some money. Every few minutes there is a new opportunity to make some more money, and so on, and so on. It is easy to get sucked into this never-ending loop of buys and sells, and that presents a danger.
When the losses start coming; the mind may not be able to process the new reality because every time one sees the movement on the chart, one expects to see some profits. This is the biggest single reason why most people lose their money on forex; they are hooked- even though they would never admit it.
This addiction makes one more susceptible to fear and greed; which are quite natural in any person. Image an addicted person becoming greedy; he takes bigger trades; which ultimately result in bigger loses.
Forex Trading Is Deceptively Easy
As explained in the section above; it is quite easy to make money on forex; one clicks a button, and then a few minutes later he finds that his equity has increased. In fact any idiot can make money from forex.
However, any idiot can also lose the money he has made. It is quite easy to trade for a day, a month, and maybe a few months, but it is difficult to be consistently profitable for a long time because forex is difficult. It just looks easy; maybe as a way to sucker fools in, and take their money.
Perhaps the following point deserves a sub heading of its own, or even an article; but it will be given here, as a way of showing why forex is deceptively easy, and why that can mean financial ruin for a trader.
On a trading platform is a wide range of assets which one can trade: AUDJPY, AUDCHF, EURJPY, EURCHF, EURUSD, EURAUD, GBPJPY, GBPUSD, AUDCAD, and USDCAD. Those are just a few of the more popular trading pairs.
If you count them, they are 10 currency pairs in number. That could mean 10 different opportunities to make money on any given day, right? Wrong! Those are just 6 currencies; AUD, EUR, CHF, USD, GBP, AND CAD.
Getting the wrong notion will cause one to overtrade; thus exposing one’s account, and one’s self to losses. The paragraph below explains further.
When AUDJPY goes up, EURJPY and GBPJPY are likely to go up as well. This is because the underlying move is caused by the JPY sinking in value. It is all one move. Furthermore, when AUDJPY goes up, EURAUD would likely go down because the underlying move is cause by the AUD rising in value. Again it is one move; only it is reflected in multiple charts. Not knowing this will cause one to make losses in forex; though an often-repeated term- overtrading.
Forex Is Expensive
Ask even the best traders how much money they lost before becoming consistently profitable. You will hear some sad stories; this is because forex is an expensive business; it teaches one the hard way.
Even after months of profitable trading on demo accounts; many people still lose a lot of money in real trading. Many traders just do not survive the learning curve; after a few loses they give up and look for other ways to make money.
Those with deeper pockets, and enough resilience, however, can survive, and though they are not immune to loses, they can become quite profitable.
Should You Trade Forex?
This is a personal question, and no attempt will be made to answer it for anyone. However, there are several questions which one can consider, and which can lead one to decide for himself whether or not forex trading is a good fit for them.
Can You Handle Losses Without Flinching?
Can You Train Your Mind To Ignore A Trading Opportunity?
If you have answered yes to the questions above, then perhaps you have a good chance of succeeding in forex. This is because no matter whatever trading strategy you wish to use, if your mind is not in order, then you are going to lose money.
But those are not the only relevant questions; consider the following as well.
Are you A Gambler By Nature?
Do You Want To Make Quick Money?
If yes, then you have a 98% chance of losing all your investments in the spot forex business. It is possible to make a lot of money, but it usually ends in tears.
Having read about what you should know before trading forex; we leave you with a question. “Why is forex trading so popular these days?” the answer is; because it makes money for the brokers. The brokers make money from losing traders; and so they can afford to do more advertising to sucker in even more traders.
There are many other options to explore; forex trading is just not meant for everyone. If on the other hand you are sure that you can trade, and do it successfully for the long term, then by all means go ahead.