Have you ever wondered why most Forex traders lose money?
There are many reasons why.
But the most common one is this – because the Foreign Exchange market is the most liquid, and every day more people want to make quick money, so they jump right in and start trading, without first having developing the skills needed for Forex trading.
Once you’ve decided that Forex trading is for you, you’ll have a greater chance to make successful trades in the long term, because you’ll develop the correct Forex skills.
So, let’s dig in and ask the golden question, is buying and selling currencies right for you?
5 reasons you shouldn’t trade Forex
#1 You have no extra money
Because the market can be volatile, there is always the risk of losing money when trading a currency pair. Losing trades over a long period of time means that your account balance can quickly fall to zero.
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 invest 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 – always trade with money you can afford to lose!
#2 You don’t really know what you’re doing
Before even considering trading, you need to know the basics of the markets, what influences them, and how trading works.
Another important aspect is that you need to have a trading strategy that suits your trading style, with strict money management and risk management rules that govern how you allocate your funds to trades.
If you have no trading experience, and you do not know how markets work and relate to each other, Forex trading might not be the right investment option for you – at least not yet.
#3 You can’t handle when you’re wrong, or when you’re losing
When making trading decisions, you can be right and make money, but there is also a high probability that you’ll be wrong and lose money.
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 definitely cannot be right 100% of the time in every single trade to execute and if you can’t handle losing, you won’t be able to be profitable in the long run on the Forex market.
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#4 You’re risk-averse
Fast changing market conditions, high volatility, and leverage can make Forex trading a high risk activity.
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 can’t handle the idea of losing every dollar in your account, Forex trading is not going to fit your targeted risk/reward.
#5 You don’t have time
There are several trading strategies you can use when trading currencies, each requiring a certain amount of time in front of the markets.
Keep in mind that learning about trading, the Forex market and how to develop the right trading plan takes time, so you’d better be sure you have time to dedicate to this activity before starting to invest in currency pairs.
5 reasons you should trade Forex
#1 You like the idea of trading at any time you want
The Forex market is open around the clock, which allows you to trade whenever you want. 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.
Forex trading can also be used if you want to buy as well as short-sell currencies. If you believe, for instance, that in the short-term the EUR/USD is going to go down, then you’re able to make money from this downward movement thanks to short selling.
#2 You like technical or fundamental analysis
Forex trading is often geared towards technical analysis, so if you have sound knowledge of price study, charting and technical patterns, Forex trading might be a good fit for you.
The impact of news is also strong on the Forex market, as currencies quickly react to macroeconomic news, political events and economical 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.
#3 You can deal with a high risk environment
As the Forex market can be a volatile market, you’ll need to be able to tolerate a certain level of risk. To better protect your trading capital, it’s important to have a sound risk and money management system with rules to follow.
For instance, you should always determine your stop-loss and take-profit levels before entering the market. In this way, you’ll already know how much you’re willing to lose and how much you can expect to earn from your position. This is called your “risk/reward” ratio.
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!
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#4 You are dedicated and patient enough to develop a trading plan and follow your investment method
Commitment, patience, and dedication are the most important ingredients in trading.
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 patient to open/close your positions according to your set-ups.
You need to develop your investment strategy first, or trading system, before investing real money on the FX market – 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 investment method:
- Trading style: scalping, day 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…
#5 You want to take advantage of a growing market with high liquidity, volatility and leverage
The Forex market has been a very fast-growing market over the last 20 years. 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 an investor to enter a trade and also reduces the risk of potential price manipulation from others.
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.
Rule of thumb
Deciding whether to trade or not to trade the Forex market 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.
Hedge funds, central banks, commercial banks, and international companies, among others, have a powerful impact on currency prices, so you should know who influences the market the most and why.
If you want to take advantage of Forex trading, it’s a good idea to use a demo account before investing 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.
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CHAPTER QUICK LINKS
- 2.Why is Forex Popular?
- 4.How Does Forex Work?
- 5.Popular Traded Currencies
- 6.History of Forex Market
- 7.FX cash, CFD or Spread Bet?
- 8.How Margin Trading Works
- 9.Best Time of Day to Trade
- 10.Forex Regulation And Protection
- 11.Forex Trading Examples
- 12.Making a Living Trading Forex
- 13.Mind, Money, Method
- 14.Forex Risk Management Strategies
- 15.Winning Forex Strategies
- 16.Technical vs. Fundamental Analysis
- 17.New Forex Trader Mistakes
- 18.Dangers of Forex Trading
- 19.Next steps