Why I Trade Forex

A couple years ago I decided to learn more about investing with the ultimate goal of taking a more active role in managing my portfolio. It was at that time that I was introduced to trading foreign currencies or Forex.

What is Forex?

Forex is the market for buying and selling currencies. Currencies from all over the word can be traded in Forex which is a decentralized or OTC (over the counter) market.

Currency prices are affected by a variety of economic and political conditions, such as interest rates, inflation, and political stability. In addition, central banks occasionally intervene in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or by buying in order to raise the price. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and depth of the Forex market makes it practically impossible for any single market participant to drive the market in one direction for any length of time.

In recent years Forex trading has grown significantly reaching a turnover of $3.2 Trillion in 2007 with a 71% increase since 2004. The Forex market is regulated by the Commodity Futures Trading Commission (CFTC). The National Futures Association (NFA) has regulatory authority over retail brokers and market makers.

Forex is a 24 hour market opening on Sunday at 5pm EST and closing on Friday at 5pm EST.

What are the Advantages of Trading Forex?

1. Low transaction cost – with most Forex brokers there are no fees or commissions, you pay only the spread.
2. Deep liquidity ensures instant trade execution and consistently tight bid/ask spreads
3. No discrimination between going long or short (no uptick rule)
4. Customizable lot sizes and leverage – Allows you to be as aggressive or as conservative as you like
5. Currency trading essentially follows the sun around the world, so you can buy and sell currencies 24 hours per day.
   • If there’s a market-moving event, day or night, you can take advantage of it.
   • 24 hour trading also means you have less exposure to market gaps
   • 24 hour trading gives you the flexibility to customize your trading schedule
6. Massive amount of information – free streaming quotes, charts, real time news, top level research – are all available for free.
7. Transparency – key information influencing currency movements is public and disseminated instantly.

What are the Risks?

1. Leverage – High leverage allows for significant gains, but can also quickly wipe out your account
2. Easy entry – the relative ease of trading Forex leads inexperienced traders to trade too early and too often, usually resulting in the loss of their entire account. Forex brokers prey on and encourage these types of traders.
3. Gambling mindset – Many traders approach Forex trading as a form of gambling and wonder why they lose their entire account.
4. Fraud and Scams – the Forex market is rife with scams and “Get Rich Quick” schemes

How I Trade

• I approach trading as a skill that is to be learned and honed over time. I spent six months successfully trading a demo account before putting any of my own money at risk by trading live.
• I am a VERY conservative trader. I plan my trades in advance and wait patiently for them to be executed.
• I am not looking to “Get Rich Quick” by trading. My goal is to grow my account organically by compounding my gains over time.
• I only risk a very small portion of my account (2-5%) at any given time.
• I ALWAYS trade with a stop loss.

Statistics show 80-95% of all new traders blow up their accounts within the first year of trading. I know traders that have done that. I also know traders that have a healthy income from trading Forex. Trading is a profession and should be approached as such. Who wants to fly with a pilot that’s just hopped in the cockpit for the first time? No matter how much confidence he exudes, you’d be a fool to go on that ride.

Trading is the same. Take time to learn your market, develop your skills and practice in a low risk environment to develop confidence. You’re not going to get rich quick, but you can develop a profitable skill that will last a lifetime.

In the coming weeks I will share more of my experience in trading Forex as well as resources that I trust that will help get you started down the right path.

Tagged as: Forex, Side Income