September 24, 2006
Forex Trading - The good, the bad & the ugly!
Despite the fact that I teach a program called Forex Profits I still I feel it is my obligation to highlight all the advantages and disadvantages of trading the forex currency markets. This way you can pick the market that is best suited for your trading goals, style and personality.
***A very important thing to remember is that you never want to jump into a market just because it is red hot and everyone is talking about it.
Look what happend before the stock market bubble burst in 2000. You couldn't go anywhere without hearing everyone talking about what they were buying. Ultimately when the crash happend millions of investors got crushed because they were trading in a market they truly didn't understand.
Ok lets look at some of the selling points that are touted on the internet in regards to forex.
1. Start-up costs are low when compared with day trading stocks or futures.
No argument here as you can start with as little as $250. To day trade stocks you need $25,000 now and for futures requires $5,000 minimum.
2. Forex is the world’s largest market. No one can corner the market. With a trading volume of around $1.9 trillion dollars a day, no single entity can control the market for an extended period of time.
This is true but in the short term there is a lot of manipulation such as running stops by the big players. Just pull up a intra-day chart and you will see quite a few price spikes. This is a sure sign of traders being faked out and stopped out.
3. Forex markets trade 24hours a day. There is no waiting for the opening bell.
While the fx markets are open around the clock except for Saturday, this is not necessarily a good thing.
In theory having a market that is open around the clock sounds like a great idea, but the reality isn't quite as sweet. You see, while it sounds great to have all these trading hours, it means there are more hours to worry about.
When you trade the stock market you know your hours are from 9:30 - 4:00 EST. Once the market closes you can take a breather.
In the forex however there are 3 distinct sessions including the Asian European and US. Huge moves could happen at anytime and many traders feel compelled to have to spend most of their days and nights glued to the screen.
In my opinion, being dedicated is one thing but don't get carried away watching the forex. If you don't take breaks you will burn out and start losing money.
The way I look at the forex markets is like a ATM machine. It's always there full of money and I can make a withdrawl at any time. I only worry about what is happening in the market when I feel like sitting down and looking for a trade.
4. Technical analysis works very well and the market trends well.
Yes the FX markets trend quite well over a period of weeks and months, but pull up any intra-day chart and there is a boat-load of choppy back and forth price movement.
5. Forex offers up to 100:1 leverage, stocks offer 1:1 or 2:1. futures offers 15:1 leverage
The reason it is possible to take a small amount of money trading the forex and turning it into a sizeable sum is due to its huge leverage. Some firms will let you trade at even more than 100:1 leverage.
Leverage can be your friend when things are going your way, but quickly turn ugly when trades go bad. You have to treat highly leveraged markets with the highest level of respect.
I really like trading the forex and this article is not meant to discourage, but instead just to get you to think for aminute about what you are getting into.
Peace & Prosperity!
Filed under Blog, Forex Trading by Jeffrey Wilde