Is Trading Forex for experienced traders only?
We have all seen the ads and headlines on various blogs, prompting the reader to try his shot at trading the different currency pairs of various countries as if it was the easiest thing to do in the world. But trading carries a high amount of risk, and the fast paced nature of currencies can be more than what a new trader can handle.
1.The differences of trading stocks vs Forex
Investing in a stock, or a stock index has a basic assumption: There is value behind it. This is easy to understand, as there are hundreds or sometimes even thousands of employees working 9-5 every single day creating products or services which can be sold. All for the single purpose of turning a profit and to have a big fancy announcement when quarterly results are published. The market, and the investors are constantly trying to keep the instruments’ price at a point they currently believe to properly reflect the current value. This takes into consideration the potential of future earnings, dividends, etc.
Although a stocks price can wildly fluctuate, it is geared towards gaining, as the company tries to earn more profits, source more clients, and grow bigger. This sets a certain tone for traders, as a stock’s price is expected to climb higher at all times.
Trading Forex on the other hand is something wildly different. Currencies are a “product” of their respective economies, be it a single country like the United States of America, or a group of them like the European Union. Although the countries and economies do have economic output, and are also expected to do well, increase their GDP and grow, they are also pitted against each other. The EUR for example might do well, but if the US does better, then the value of the EUR will definitely fall compared to the USD.
When trading Forex you always trade currency pairs so usually you have to take fundamentals into consideration in order to position yourself before big moves. The volatility in the global markets causes a lot of volatility in all the currency pairs. This in itself is not a big deal, but there is one other big factor.
Leverage is nothing new. Traders in the early 20th century had already access to it in one form or another, but to a limited extend. Nowadays it is not seldom that you can find a Forex broker offering close to a 1000 times leverage. This means that a trader with $1000 is able to open a position worth of $1,000,000 or 10 lots. Each pip move will result in $100 gain or loss, meaning he can wipe his account clear in 10 pips – a move that usually happens within a couple of seconds. Obviously he can also earn this much or even more, if he is on the right side of trade.
From a pure technical point of view there is not much difference between stocks, commodities or Forex. A chart is a chart, and if you believe in technical analysis then you assume that all information is included in the chart – an extension of the efficient markets theory. There are, however very small differences which only a seasoned trader might be able to spot.
Chart patterns, for example, have a much more limited validity when trading Forex. It is often that you can see a perfectly formed head and shoulders pattern, or double top at the end of an uptrend. You might be able to get in short when the breakdown happens, just to be stopped out within minutes or hours when the FX pair makes a 180 degree turn to resume its climb. A chart pattern like this on a stock is usually much more dependable. The underlying fundamentals are much more pronounced in the chart, and the stronger currency pair will always have the upper hand, at least on the chart.
Obviously there are some good setups, and it is possible to trade Forex efficiently and successfully. The bigger players and many institutional investors do so, but they usually use no, or only a very low amount of leverage. This brings the potential return down, but it is quite hard to go bankrupt when you simply convert your funds from EUR to USD without using any leverage. Say for example a trader is long the EUR/USD with 3 times leverage, bought at 1,1500. In order to lose everything the pair would have to trade around 0,8050 – a move like this will not happen overnight (with very few rare and extreme exceptions), and if it does indeed drift lower to such levels then this trader would have plenty of time to exit the position.
All in all you don’t have to be a seasoned veteran just to start trading Forex. If you adhere to strict money management rules then it is just as simple to enter positions as it is with stocks, with the added benefit of 0-24 liquidity during the weekdays. If you learn the limits of your trading account then you can also learn to handle the leverage your broker offers, giving you a very powerful tool to earn above average returns. And best of all, this tool can always be at your fingertips, no matter where you go or what you do, allowing for unprecedented freedom. And that’s all that matters.”
or what you do, allowing for unprecedented freedom. And that’s all that matters.