Chapter 3
Why Forex is or isn’t for you
So, you might like the idea of being a Forex trader, but it is not right for everyone.
Back in 2016 the UK’s Financial Services regulator, the FCA, conducted a review of retail trading – not just Forex, but all types including CFD trading and binary options – and found 82% of retail traders lost money. Trading is a zero-sum game so there are going to be winners and losers but this ratio led us to two conclusions:
- This underscores the importance of working out if Forex is right for you…before you consider risking your money on it.
- It means the 18% balance must either breakeven or be profitable – about 1 in 5.
We’ve pulled together the reasons traders should and shouldn’t be trading Forex for. All aspiring Forex traders should be asking themselves their reasons for getting into Forex trading before they get started.
If you can honestly say its for the right reasons, and not the wrong reasons you’ll have a much greater chance of making a success of it, of being in the 1 in 5 group of traders, over the long term.
- Learn more, take our premium course: Trading for Beginners
5 reasons why you shouldn’t trade Forex
In addition to the inherent risk linked to trading, with Forex trading you need to add margin trading and leverage, which means that you can trade large amounts with little initial capital.
So, this high level of risk means that you need to be sure that you do not use money that you need to live on – it sounds an odd thing to say, but make sure you always trade with money you can afford to lose!
If you have no trading experience, and you do not know how markets work and relate to each other, Forex trading might not be right for you – at least not yet.
Must-reads:
That’s fine – as long as your profits are higher than your losses. Losing trades are part of the trading game – you need to be prepared for this and not take it personally!
In Forex trading, you need to quickly recognise when you’re wrong, and close losing trades as early as possible. It’s important to develop your ability to accept your losses and learn from your trading experience.
But do remember, it’s ok to be wrong – you can’t be right 100% of the time in every single trade you execute. And if you can’t handle losing, you won’t be able to be profitable in the long run.
You can make huge returns in the FX market, but these kinds of returns do not come without risks, especially when using leverage.
So, if you’re generally a risk-averse person, Forex trading is not going to fit your personality.
There are several trading styles you can use when trading currencies, each requiring a certain amount of time in front of the screens.
For example, you can use a trend following method, or position trading strategy, which will require less time than short term trades, like scalping or day trading.
Keep in mind that learning about trading, the Forex market and how to develop the right trading plan takes time. You’d better be sure you have time to dedicate to this activity before starting to trade in currency pairs.
Must-reads:
5 reasons you should trade Forex
It provides great flexibility for traders who want to trade part-time and as there are no market opening or market closing times the opportunity for potential profits is 24 hours per day, 5 days per week!
Of course, trading volume varies depending on how many sessions overlap, and it often decreases when there are bank holidays in major sessions such as on Wall Street.
The impact of news is also strong on the Forex market, as currencies quickly react to macroeconomic news, political events and economic data.
So, as a Forex trader, you should monitor the economic calendar for fundamentals to determine when currency pair prices might accelerate and break important levels thanks to higher volatility.
Another example would be to adapt the size of your positions depending on the current trading conditions and the evolution of your trading capital. All these rules should be part of your trading plan and to be profitable, you should always stick to your plan!
Read: What are Trailing Stops?
Having a trading plan to follow when trading is vital if you want to be successful, but most importantly you need to be committed to follow it, and patience to open/close your positions according to your set-ups.
You need to develop your strategy first, or trading system, before trading real money on the Forex markets – if not, how do you know what you’re doing, and that what you’re doing is making money?
A trading plan is a description of your trading method:
- Trading style: scalping, day trading, swing trading, position trading
- Currency pairs: majors, minors, exotics
- Timeframes 5 min chart, 15 min chart, 4h chart
- Size of your positions
- Set-ups to follow to enter/exit the market
- Risk and money management rules: risk/reward ratio, stop-loss and take-profit orders
According to the 2016 Triennial Central Bank Survey of FX and over-the-counter (OTC) Derivatives Markets from the BIS, trading in foreign exchange markets averaged $5.1 trillion per day in April 2016.
This high trading volume increases the liquidity of the market, which means that it’s easy and fast for a trader to enter a trade and also reduces the risk of potential price manipulation from others.
Read: What is Illiquidity in the Financial Markets?
Forex trading also uses leverage that can magnify your returns (as well as your losses) in a very short period of time. This leverage allows you to manage more money than you currently have in your trading account for potentially higher profits.
- Take our free course: Getting Started with Charts
- Take our free course: How Traders Interact with the Markets
- Take our premium course: Trading for Beginners
Rule of thumb
Deciding whether to trade or not to trade the Forex markets is up to you, but remember that even if you’re one of the smallest actors on the Forex market, you can still profit from it. Take your time going through your reasons for wanting to trade and you’re doing it for the right reasons – if you are it is more likely you’ll make a success of it.
If you want to take advantage of Forex trading, it’s a good idea to use a demo account before risking real money in your trading account.
There is very little chance that you can be successful without trying out your broker’s trading platform first. This includes real-time charts and trading tools, its trading conditions to test your own trading system.
Start learning now
Learn the skills needed to trade the markets on our Trading for Beginners course.
