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
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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
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
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
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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