You may have heard about Forex trading and seen many sites on the internet propagating this seemingly great investment opportunity. In fact, a lot of interest has been generated in this investment instrument. There are some organizations running TV commercials, offering this "Forex trading" as a sure fire system that is expected to bring windfall profits in an easy fashion to the individual investor; along-with the fine print of a disclaimer.
The investor is well advised to ask a few questions. So, what is Forex? And what's new about it?
The exchange of currencies is said to be amongst the world's oldest professions. As long as there are two sovereign states with their respective currencies, there would be a foreign exchange as a facilitator for trade in those currencies. Foreign exchange has been abbreviated to Forex and has been around as a trading platform for centuries; with a present day daily turnover of US$ 1.90 trillion.
Essentially it is a global marketplace with no physical exchange building where all claims on foreign currencies are settled, between governments, corporations, investors and speculators amongst the other participants in the Forex markets.
Banks have traditionally been the middlemen who provide the liquidity to this mammoth market, which is trading round the clock across various locations of the globe.
In more recent times, the internet came along; and all of a sudden it became possible for everyone and anyone to transact and trade in the market. What we might say, "get a piece of the speculative action". Next, brokers sprouted up out of nowhere with their electronic trading platforms and offering high leverage to their clients. Basically, the brokers lent funds to their clients to speculate with. A leverage of 100:1 and in some cases 400:1 is offered to the clients. This would mean that with a trading account balance of US$ 10,000.00 the investor (speculator in this case) can control up to US$ 40,00,000.00 in the currency markets. This is much higher than is possible in the stock market.
Many people have been attracted to this possibility of earning fast profits from Forex. Often there are sharp movements that can turn your US$ 10,000.00 into US$ 20,000.00 in a matter of minutes; and on the other hand you could be wiped out, due to adverse market action. However, the lure of making a fast buck has turned would be speculators into out-and-out gamblers.
The internet has also made it possible for an individual investor to obtain "charts", that enable technical analysis on their own PCs. The theory being that price patterns repeat themselves. So, if you have a system of analysis in place; you are expected to be able to predict future price moves in the market. A tall order for any individual investor.
Even if the individual investor were able to successfully predict future price moves, we have not addressed the psychology of trading; which would include the waves of fear and greed that cause irrational market behavior. People are often taken in by the seller of a Forex trading system; often paying US$ 5,000.00 for a software which shows a green light to buy and a red light to sell. In spite of this, they don't teach you how to manage your money.
New investors to Forex trading do not know the rules of engagement and therefore conduct themselves like speculators. Further, a large percentage of these investors lose all their investment capital within the first year. We must realize that, Forex trading is just like any other business and a certain amount of planning would be required. Also being a profession a certain level of training would be essential.
Like other investment instruments, we have to keep the risk and reward in perspective. The investor would realize that there is a high level of risk in Forex trading, and therefore the expected return is also high. So, in the planning process, the investor would have to decide upon his own level of acceptable risk. However, new investors are unable to reconcile this risk-reward equation; and therefore do not have control over either the risk or the reward.
New investors have unrealistic expectations of profits from Forex trading. The investor may overcome this by deciding in advance the parameters of trading and then follow them diligently, to achieve a certain amount of success.
Before venturing into Forex trading, the investor would be well advised to find a teacher or mentor. This mentor is expected to firstly explain the theory behind Forex trading; then guide the investor through sample trades using pen and paper; and finally guide the investor through Forex trading in real time using real money. Further, the investor would be able to draw upon the mentor's experiences and avoid the common errors he may have otherwise committed.
Forex trading in itself is safe if the investors were to be realistic in their expectations and have done their initial preparation. The investors would realize that it is hard work and can provide a profession or a source of income to them. However, the investors must be on their guard against scamsters like in any other business.