A lot of interest has
been generated recently in FOREX trading, hailed by some as the great new
investment opportunity. There are even companies running TV infomercials,
offering sure fire systems that will bring massive profits in an easy
fashion.
So what is forex? Is it something new? The exchange of currencies is said
by some to be the world's second oldest profession and as long as there
have been two sovereign states that have issued their own currencies,
there has been foreign exchange as a facilitator for trade.
Forex, as foreign exchange has been abbreviated to, has been conducted for
centuries and has become a global market with a daily turnover according
to a recent Bank for International Settlements survey of $1.9 trillion
(billion, billion) per day. Essentially it is a global market place with
no physical exchange building where all claims on foreign currencies are
settled - between governments, corporations, investors and speculators
among others. Banks have traditionally been the middlemen who provide the
liquidity to this gigantic market, which incidentally is traded on an
almost continuous 24-hour basis.
Then came the Internet and suddenly it became possible for everyone to get
a piece of the speculative action. Brokers sprouted up with their
electronic trading platforms and high 'leverage'. Essentially the brokers
lend clients funds to speculate with, 100:1 or in some cases up to 400:1
ratio, or leverage. This means that $10,000 can 'control' up to $4,000,000
in the market. This is far higher than is possible in the stock market.
Many people have been
attracted to the possibilities of earning fast profits from forex. There
are often sharp movements that can turn your $10,000 to $20,000 in a
matter of minutes. You can also get wiped out, but the lure of a fast buck
has turned would-be speculators into out-and-out gamblers.
The Internet has also made it possible for the individual to obtain
so-called 'charts', that allow them to do 'technical analysis' on their
own PCs. The theory is that price movement patterns repeat themselves, so
if you have a system of analysis, you can predict a future move in the
market.
This may well be the case, but it does not address the problems of the
psychology of trading - the fear and greed that drives many to irrational
behaviour. People are often taken in by the seller of a system, often
paying $5,000 for a piece of software that shows a green light to buy and
a red light to sell. However, they don't tell you how to manage your
money.
So speculators lose. It has been estimated that 90% of new investors in
forex lose their capital in the first year - an appalling figure. What can
one do to avoid being a victim? Well, forex is a business like any other
business and planning is required. It is also a profession and as such,
adequate training is necessary so that you understand fully what forex
trading is all about.
Many are prepared to invest thousands in forex trading without really
knowing what it is all about. Just think if franchises were offered in a
major hamburger chain without the franchisees having a clue how to run a
restaurant or even make the burgers. The failure rate would also probably
be 90%!
As with all investing, it is all a matter of risk and reward. Investing in
Government securities is considered low risk, therefore they carry the
lowest return. Increase the risk (the probability of loss on the
investment), the higher an investor is rewarded in terms of return. An
individual trading forex decides his own level of risk, which should
dictate the level of reward. However, in the hands of an inexperienced
trader, the two factors are impossible to reconcile, meaning in stark
terms that traders cannot control the risk or the reward levels.
People attracted to forex trading often have an unrealistic expectation of
what can be earned. To start with an investment of $5,000 and expect to be
making $100,000 a year after the first year is unrealistic. It is not
impossible; then again, neither is winning the lottery.
If the parameters for trading are laid down and adhered to combined with
knowledge of forex trading, success is possible. It does not take much in
the way of 'enhanced' returns to be able to double an investment. 26% per
annum is required to double your investment within 3 years.
Who is going to teach you? There are some very good courses available, but
these will only give you the theory, in itself very important. The ideal
way is to have a mentor, or guide to show you the way.
Getting mentored is a wise move because it makes it possible to draw on
the experience of a veteran expert and avoid making the common mistakes
that cause the unwary to suffer catastrophic losses. After a while under
guidance, a forex trader will gain the experience
The bottom line is that forex is not in itself a scam. There are for sure
scam artists who prey on individuals' greed as there are in any other
business. If it is approached in a sensible and realistic manner and the
trader is prepared to work hard, forex can provide a good living both
financially and materially.
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