Don’t Blame Forex!

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Any time you have a situation where people end up disappointed with their performance in the market, there are going to be claims of fraud and malfeasance.   This is certainly the case with Forex trading. Recently, a small group of reporters and bloggers have taken aim at the retail Forex industry.  Some have even gone to the extreme of comparing Forex trading to casino gambling.

As we have seen in recent years, investors in any of the financial markets need to be wary of scam artists.  There are plenty of ponzi schemes and other scams involving stocks, commodities, real estate, and a host of other markets. However, that shouldn’t be a reason to avoid an entire market.  Most stock, commodities and real-estate brokers are completely fair and transparent in their practices, but unfortunately the opportunity to be unfair and deceptive is there for those who want take advantage of people. The Forex market is no different, but it is important not to let a few bad apples spoil the entire bunch. 

So, is Forex trading a scam that all people should avoid?  Absolutely not.  Is Forex trading suitable for everyone?   No it isn’t.  A common mistake among personal finance writers out there today is using the labels trading and investing interchangeably.  These two approaches to the markets are not the same.    

Most of us would agree that trading is not something most individual investors should do if they are looking for predictable returns.  It is irrelevant whether you are talking about stocks, bonds, futures and commodities or currencies.  Many individual investors are simply not good candidates for trading, because they lack the time, patience and resources for the appropriate level of investor education and risk tolerance necessary to succeed in these markets.     

However, for more sophisticated investors with the proper risk profile, Forex trading can be a suitable way to add higher returns to your overall portfolio.  Let’s examine some of the benefits of Forex and how Forex trading compares favorably with futures or stock trading.  

Forex is the largest financial market in the world.  The average daily trading volume in the global Forex and related markets currently is over US$ 3 trillion, which dwarfs the combined world equity markets.    

The Forex market is unique compared to other financial markets due in large part to: its large trading volumes; extreme liquidity; large number and variety of traders; its geographical dispersion – for some people analyzing countries might be easier than analyzing companies – and its long trading hours: 24 hours a day except on weekends (from 5pm EST on Sunday until 4pm EST Friday). 

Like any financial market, Forex currency trading requires proper regulation.  Every country has its own governmental financial institution and independent regulators that supervise and control the Forex industry and work to protect its investors.  In the United States, a Forex broker must be registered as a Futures Commission Merchant (FCM) with the government regulators – the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).  These regulators serve to protect the public against fraud, and manipulative trade practices.

These agencies impose strict regulation requirements and large capital requirements on all Forex brokers.  More specifically, beginning in 2008 the NFA required Forex dealers to increase their capital reserves in stages, ending with $20 million in net capital reserves for each Forex broker by 2009.    

On weekly and monthly bases, Forex brokers are required to submit financial reports to regulators, who in turn have the right to fine Forex firms and/or terminate their regulatory status for violations.    

In the Forex market traders usually enjoy lower overall transactions costs and pay only a very small spread.  In the stock market, individuals generally place their orders with a broker who charges a commission, and the firm who executes the order on the exchange charges a spread.  This is a cost that is usually hidden in the equity markets, but is more transparent in the Forex market. 

Further, many Forex brokers charge no commission or exchange fees to trade Forex online or on the phone.  Costs are further reduced by the efficiencies created by a purely electronic marketplace that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen.

 Another difference between Forex and other markets is that you will not incur a deficit balance in your trading account.  This is not the case with futures and equities markets where it is far more likely to incur losses that exceed the present balance of your account.  This point is rarely brought up by critics of Forex trading.  

Another protection for traders is that in the Forex market, spot rates cannot be manipulated.  This is due in large part to the sheer size of the Forex market.  There is no single institutional investor, central bank or even government that alone can completely influence price for more than a few moments.  The same cannot be said for other markets that are more thinly traded.

Moreover, Forex traders can benefit from a wealth of free information and investor education that is available online (www.Forexlive.com).  Here you will find some of the greatest resources for Forex education that can speed up your learning curve and help you build up your confidence.    Before starting to trade your own money, it is highly recommended to start by opening a demo account to practice trading with “make believe” money.  This way you can learn from your mistakes without risking capital.    

Another reason why Forex trading requires a measured approach is leverage.   The impact of Forex trading leverage can be enormous.  It is important for traders to choose the amount of leverage they are comfortable with, if any. The use of leverage is a personal decision that requires an individual to evaluate their appetite for risk and assess their own financial situation. 

The importance of understanding leverage only confirms the point discussed earlier that trading and investing are not the same.  Again, these two approaches to the markets should not be intermixed as they require varying levels of investment education, understanding of the markets and different degrees of risk tolerance.   However, both approaches have one fact in common; prudent risk management is the key to success.   

In conclusion, anytime you engage in financial transactions that involve the risk of capital loss, you should be careful and diligent.  Do you homework and spend the necessary time and resources to educate yourself about the market.

Anna Timone (195 Posts)


Comments

  1. Thank god i’m out of the market and refrained from trading today… I realized if i did as i used to.. I’d have lost much

  2. Completely agree !

    I have been trading Forex for living since 2005.
    Significant progress has been made since reading this site
    last year, consistent profit made.

  3. Basically broke even today. Was way ahead before this market rallied and dumped. Absolutely no rhyme or reason for the moves. Personally, I think the forex market has a bit of FIX. It is too transparent with bigger players knowing what the orders and stops are in place. Keep things invisible and the “big boys” won’t be able to clean out the bit players.

  4. Recent examples :

    1: Bought EUR/JPY at 112.5 , take profit at 120.00
    2: Bought GBP/JPY at 130, take profirt at 137.00
    after analysing Seans information
    3: Long EUR at 1.40 and took profit at 1.45 from Gerry
    4: Took short position on EUR/USD qt 1.4480 last week and have just squared
    at 1.4170 , following Gerry’s remarks.

  5. Could you give us the link just to read the reasons… I like to read the reasons for not being able to succeed in the forex market…

  6. what happened to usdchf chart is this stop chasing?

  7. Don’t use model answer style to trade, ( the pitfall of learning
    short cut in Exam from school, university.. ), use lateral thinking.
    A zero sum game should be tackled upside down. The experience
    of grown up and normal sense of value would be poisons to trade !

  8. Now , you see, after squaring at 1.4170, the Euro is rebouncing sharply !
    The big boys are taking profits.

  9. Huydecoper says:

    Thanks again Anna, great piece!

  10. Mak, great trades you cited as examples. Do you use any other methods to select entry and exit levels, other than info from Forexlive?

  11. Hmmmm, that’s the 4th time i loose half of the initial investment, and right after i recover, i blow it again.

  12. This whole year started choppy, full of spikes and has turned FX into fulltime stop chasing game by the big boys. Also notice, ranges have decreased for pairs. So it’s take 10 pips n get out thing, if you wait too long price can chop your equity away. Also position sizing is key to survive in this game. I say, go in with 20K, play 3-5$ a pip, aim for 20 pips a day, be happy with what you get, until your account size grows to 100K if one compounds at 1% its possible less than 2 years.

  13. @mark: pls what other strategies do u use?

  14. romanoff37 says:

    I am Always amazed when people think they can get rich quick and without working hard those are the people most likely to fall for the mentioned scams, in regards to people not being successful as retail forex traders the same concept is relevant. one of my trading teacher ones toll me that in order to learn to trade there is a learning curve that you have to experience and being able to afford in other words you there is time and money (losses to you training account) because I have not known a retail forex trader that has not totally bl-owed his first trading account for me personally took me 3 times but because this accounts were small compare to my income I was able to learn from this mistakes dust my self and jump on the horse again, they are to many variables that a retail forex trader have to discover and learn from it this takes time to learn because the market has the ability to expose your weaknesses is important to learn how the market move or support and resistance works (I am being basic) is critical to learn your physiological makeup you need to learn to control you greed and fear this personalty has being the hardest obstacle in my trading career I have traded the forex for 6 years know (not for a living but in a training scenario my physiological makeup will never allow me to do this for a living ) for the past 2 2 ½ years I have profits on my trading account is funny but I got the money back from my previous 3 ½ loosing years and then some and I still consider my self in learning mode. My wife is my manager she does not have a clue about the market but she knows what are my rules in my trading plan and she makes me accountable for my trades no more trading an praying or let the looser trades run or not taking profits on accordance to my plan this has make the difference and I have realistic goals I get 2% to 3% profits each month for the past 2 ½ years except for the occasional 2% to 3% looser month. Trading is hard work you have to invest time and stress you have to research your trades this website is one of the best free resources available.

  15. the only problem is that we dont get full information as large traders about stop loss and take profits..
    so we dont blame forex …
    but it is not “fair play”…

  16. Wilberforce says:

    Dont blame it on the good times, dont blame it on the bad times, dont blame it on the info, blame it on the forex!

  17. Some good comments, and I find it amazing to use a platform on the computer that executes a trade on the other side of the world in such quick time. Even on a mobile phone these days!
    When the market is volatile you are warned upon signing on the dotted line that all trades may not be filled, but I find very few times in normal trading conditions that they don’t go through. The disclosure document is long, and it is up to the account holder to read it properly, and preferably at least twice. Then you will have systems in place not to get wiped out unexpectedly. Or you learn real quick what you did wrong!
    There can be an element of gambling depending on your research and trading strategy, but if you really learn and keep learning, you will be trading instead of gambling based on your knowledge and assesment. Also money management is part of learning, and you really do need to learn that as much as assessing the market/charts.

  18. Yep, money to be made, but doesn’t mean its easy.

  19. Great article. Worst thing about forex is that beginners can be rewarded for doing the right thing using the wrong reason. Trading depends so much on psychology, its very important not to create beliefs about trading based only on results. Always ask yourself why. Even after the trade is over. It took me 4 years and six accounts to figure out. FX is not a scam, for me its a challenge between waiting to see something I really believe in and and hoping for something that just isn’t there.

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