Does forex trading really work?
If you are just about getting started with trading forex or have been trading forex for a few years but really have nothing to show for, you might be wondering whether forex trading really works.
You might be asking this question for a number of reasons. Firstly, you are just getting started with trading forex. You don’t really know if you will be able to make a decent amount of money trading the currency markets.
You might also be asking this question because you have been trading forex for a while, but the profits are negligible. Perhaps even worse, you are losing money trading forex. It is not surprising then that this question comes to mind when someone is looking at the forex markets.
Why do people invest or trade? The answer is basically to have their money work for them. With the forex markets, due to the immense amount of competition in the markets, you might have come across advertisements from various forex brokers. These brokers sell you dreams of getting rich.
You could also have come across various Youtube videos of so call successful forex traders who promise to teach you their way of trading for a fee. It is easy to fall prey to such market tactics. And quite often, one tends to think if it is really worth it to trade forex. After all, with no profits to show for, what else can you expect?
One of the main things to remember is that forex trading is no different to trading stocks. For sake of similarity, we mean by day trading currencies and day trading stocks. The financial markets move based on the same principles. It is just the difference on what moves these two separate markets.
So, if you have been unsuccessful in day trading stocks, do not be under the illusion that you will be a success in the forex markets. The vice versa rule also applies. Day trading or speculating is risk. You can end up losing more money that what you invested. It can be long journey that takes time.
Many industry experts quote that nearly 90% of all retail traders lose money. This happens because traders are primarily greedy. They always look for a way to get rich. In this aspect, forex trading is the perfect thing to make extra money on the side.
You can also partly blame the forex brokers who use this factor of greed to their advantage. By selling you the dream that you can make a lot of money with forex trading, you are basically being sold a dream. The reality is far different from what you initially see.
Therefore, when the average retail trader loses money, these questions come to mind. There are many instances where traders have lost all their invested capital in trading. This usually occurs within the first few months itself.
Is forex trading worth it?
The answer to this question can be found by simply changing the question itself. Is any new profession or skill worth it? The answer can be found by how you as an individual will respond to it.
If you want to achieve something, such as learning a new profession or a new skill, your perseverance matters. With forex, it is a mixed bag. Some traders are truly patient and genuine. However, many traders are there simply to make a profit.
So yes, is forex trading really worth it? The answer depends on your response. Many traders fall prey to the get rich quick scheme. This makes them to believe that they can earn one full month’s salary in just a day.
But trading is not that simple. You need to pay attention to your trades, follow the rules of risk management and have an understanding of the markets. All of these things cannot be learned overnight.
Imagine if just about everyone wanted to become a doctor overnight. Is that possible? Obviously no! It is the same with forex trading as well. You cannot expect to see big results overnight. Many successful traders have been at the game for years on end. They have lost money and learned from their mistakes and continued to learn how the markets work.
It is only after quite a few years that one can truly say that they are successful traders. Another common issue that you will find is that many traders are just not willing to learn. Now a days, you can find many trading strategies and automated trading systems that are sold in the market.
Traders flock to such products because they believe that it will give them the edge. In trading circles, this is also known as the search for the Holy grail. There is no such thing as a holy grail and there is no trading system that will always be right.
If that was the case, the markets are too smart, and the loopholes would be easily exploited. Thus, as you can see, many traders give up trading and conclude that it is not worth trading forex because they have their priorities wrong.
If you think that you can get rich by trading forex, then the reality is that you could expect to become rich by buying a lottery ticket. Buying a lotter ticket is a lot more cheaper and hassle free compared to trading forex. The odds of winning big are equally the same.
But unlike lottery tickets where you cannot influence the outcome, in the forex markets you can. You can influence the outcome of your trade by incorporating the various elements of trading and investing that are essential.
Traders also have unrealistic expectations. If you look at various forex forums you will find people asking for a forex money manager. Their requirements are usually absurd. They expect the forex manager to make them 20% returns every month.
That is unheard off in the markets. As you can see the chase for riches and money makes traders to lose focus on the real aspects of trading and instead focus on money. No wonder many traders give up while most end up losing their money.
What is the right way to get started in forex trading?
Having read the above, if you are genuinely interested in forex trading, then these steps will help you to slowly get accustomed to forex trading. It will gradually make you familiar with how the forex markets work.
1. Start by following the currency markets:
You do not have to pay huge subscription fees. Simply make it a practice to read the financial headlines every day. You can visit websites such as CNBC.com or Bloomberg.com to get an understanding of how the currency markets work. There is a lot of content. Over a period of time you will grow more familiar with the trends and other things that happen in the currency markets.
2. Invest in a good book:
Many traders pay money for the most useless things such as automated trading systems or forex signals provider and what not. Of course, the temptation is quite high. After all, who doesn’t want to give a shot at making money while not having to lift a finger? Investing in a good trading book can give you the lowdown into how trading is done. There are a number of established authors who publish with big publishers. These books can give you tons of information about how the markets work. It is also a good learning ground for you to pick up on some concepts that you find interesting.
3. Open and trade with a demo trading account:
Don’t make the silly mistake that many other forex traders do, which is to open a real trading account and risk all their invested capital. If you do not know how to drive, there is no point in buying a new car which you will most likely crash. You need to learn to walk before you can run. Therefore, spending time, just a few hours a day on a demo trading account will slowly help you to get more familiar with trading and the various nuances that come with it. It is ideal that you stick to a demo trading account for at least six months if not more. Market conditions are unique and therefore you need to have sufficient exposure to the different behaviors in the market.
4. Start saving money that you can invest in trading:
Firstly, never invest money that you cannot afford to lose. This means you should never use your pension fund or your credit cards to fund your forex account. No matter how big the temptation might be, just avoid this! You will end up losing money as well as having no savings with debt on top of it all. As you get familiar with the markets, start putting aside whatever little amount of money you can. Over the months, let this fund grow to a point that you can use this money towards opening a real forex trading account.
5. In the meantime, practice and learn all that you can:
While you follow steps 3 and 4, practice so that you do not lose track of the familiarity with the markets. The more you practice, the higher the chances. You should also start reading simultaneously about the various things in the markets that you will likely encounter. Remember that forex trading is a journey and it requires a lot of hardwork and dedication.
Why do many forex traders lose money?
The answer to this is because traders either do not have realistic expectations or they are just plain greedy. Because we are dealing with money, greed is something that traders will have to battle day in and day out.
Speculating in the financial markets is the only skill where you can make money from money. But of course, you can just as easily lose all your money. This can happen when you get complacent or too greedy. Being disciplined when trading is an important psychological trait to have.
If you think you are a generally impatient person, don’t let that bother you too much. You can learn how to be patient when trading. Of course, the downside being that this will take years to perfect.
Having realistic expectations will also help you to make money in the long term. For example, if you want to know what percentage of returns you should be making over a six-month period, look no further than your local bank.
Check out the interest rates that they pay on fixed or term deposits. This is basically risk-free money that the bank pays. If the bank is paying an interest of 2% per annum, this means that you should aim for 4% per annum. To achieve a 4% return per annum on a forex trading account is not at all difficult.
Add to this the power of compounding and you will see your money start to grow exponentially. But yes, let’s not get too carried away. Coming back to the topic, we just illustrated how setting realistic expectations can help you manage your expectations from trading forex.
Many people dream about giving up their day job and trading from home. This is something that requires a lot more than just dedication. You need to be constantly learning how the markets work. Still, despite having enough practice you might end up losing money. All it takes is one black swan event in the market to wipe out all your profits.
The consistency in the profits you make from forex trading can differ compared to drawing a regular steady income. So, if you are thinking about giving up your day job, don’t do that. You should firstly follow the rules outlined that will help you to get familiar with how the markets work.
Trading, just like any other profession takes a lot of time, effort and practice. If you are unwilling to put this but expect to make money, then certainly forex trading is not worth it.