Why Trading Forex?
Trading means buying and selling a financial product with the intention of making a profit. There are numerous financial products that can be traded, starting with the classical stock market, indexes, options, commodities, CFD’s (Contracts for Difference), etc., but Forex is the most popular. Financial independence is the main reason why traders chose this path, but mastering the art of speculation is not an easy task. Speculation is more about psychology than knowledge, and combining them both is an art.
Forex trading appeals to human nature because it gives the possibility of building great fortunes in a relatively short time. Losses can incur as well, and the clear majority of Forex traders are losing their first deposit. This is one of the reasons, but not only, why all Forex brokers must warn their clients that losses can appear. Furthermore, because Forex is a leveraged business, these losses can exceed the deposited amount.
Ease of Access
Ease of access is one reason. Anyone with a stable Internet connection can open a trading account with a Forex broker and start trading. To open a trading account there is a simple procedure that must be followed and sometimes it takes less than a business day. A usual opening time for documents verification takes around two business days, depending on the broker. But the overall process is easy to follow and straightforward. In a couple of days, a trader can access the Forex market.
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Trading is heavily promoted, and Forex trading even more. Again, the psychological component of the business and money, in general, plays an important role. It is being known that people are drawn more by the prospect of winning a hundred dollars rather than losing it, and this tells much about why more and more people are being dragged into Forex trading.
The overall business, like the betting industry, is heavily promoted on classical channels like television and business channel, but mostly in the online environment. From emails in your Inbox to banners based on your IP search, trading companies (Forex brokers) know how to reach the right persons interested to trade currencies.
Advantages and Disadvantages of Forex Trading
By far, the main advantage is the fact that it offers the possibility to realize profits in very short periods of time. This is what attracts people to Forex trading. Forex trading is not easy, though. The fundamental and technical analysis must be mastered as speculation is not for everyone.
However, the prospect of making a quick buck is a strong incentive. Everyone dreams of being their own boss and making their own schedule, and Forex trading is a suitable vehicle for reaching that dream. The biggest disadvantage is the fact that the clear majority of Forex traders, if not all of them, start this journey not knowing what trading is about. This is the reason why most of the initial deposits are being lost.
Forex trading is advertised as being an easy business and all you must do is to sell or buy some currency pairs. It sounds simple, but when you do that day in, day out, for a profit, things are not that simple anymore.
Another drawdown comes from the fact that trading now is mostly done by robots or trading algorithms, and humans follow robots when trading the currency market, and not only. This makes for the most part of the main move to be missed if scared to trade an economic release.
However, despite all its negative parts, the simple fact that it can be a solution for quick reaches to be made, is enough of an incentive for many people. And, in some cases, this turns out to be true.
Traders’ Expectations vs. Realistic Approach
Traders approach the Forex market with two things in mind: to make tons of money in as little time as possible and with as little effort as possible. That’s everyone’s dream! For those that start Forex trading with such a goal, success in trading this market will never come. The Forex market is well-known for its quick swings and strong moves when no one is expecting.
To survive all these violent moves, there are two things to consider: patience and discipline. Therefore, a realistic approach will be one that allows the account to grow in time, with good and bad periods. It is only normal to have bad periods when trading. If traders cannot accept the fact that losses are part of the trading game, they will never win.
What is important is for the trading account to grow and for this to happen losses must be taken. I know that it sounds like an advice that you already heard, but this is true. The problem comes from the fact that this is easier to be said than done. How to cut your losses, and how to let the winners run?
What if after cutting a loss the market is turning and reaches the take profit? Or, after booking a trade with a nice profit, the market continues in the same direction? All traders do is to calculate the opportunity cost that was missed by closing the trades too soon. The result will be a new trade that is open and that one is going to be a loser.
Fear and greed are two components that govern life and trading and the Forex market is dominated by these sentiments. Traders must accept that is not possible to trade all the moves to the absolute higher or lower values. A sound realistic approach to Forex trading is a gradual increase in the trading account. This should be the result of proper money management techniques implemented based on the trading style used.
Traders that have a bigger horizon for their trades and take their trades from the bigger time frames are using pending orders more often than traders that scalp their way to profit. All these must be incorporated in a trading plan. It is normal for a few months the account to consolidate, or losses to occur, but if the overall trend is a positive one, then the trading purpose is achieved. That is, to trade profitably.
Each individual trader has its own trading strategy and it is basing it, ideally, on both fundamental and technical analysis. But any strategy should consider losses for the bigger goal to be achieved. All in all, there are multiple reasons why people chose to trade the Forex market but mostly is because of the huge transformational potential it has. This comes at a cost, though many hours to be spent in front of the screens, having to cope with periods of uncertainty and periods when the market moves without a logic, etc.
It is extremely interesting and minds challenging to trade the Forex market, though. And if a profit can be realized, why not giving it a chance?
Recommended Further Readings
- What is a Forex Broker and Types of Brokerage houses?
- Financial Products to Trade
- Forex Trading Sessions and Their Importance
- Forex Brokers Types – ECN or STP?
- What Makes a Good Forex Broker?
Other Educational Materials
- “Exchange rate volatility and international trade.”. Tsen, W. H. J Stock Forex Trading 3 (2014): 1-3.
- “The global economy.”Corporations, Transnational. Kings College (1998).