Many people go into forex trading expecting to make a quick buck. However, the reality is often far from this.
Now, you don’t want to enter trading with the same misconceptions in your mind. This lesson will help you understand the realities of forex trading and why it is seldom a route to getting rich.
Lesson Highlights
- Trading in the forex market is risky and not suitable for all types of traders.
Forex Trading Is Risky
Forex trading is risky, with a capital R. Trading financial assets, or any other securities, always carries a high degree of risk.
This is why you’ll always see disclaimers on broker websites emphasizing the large percentage of traders losing money in forex trading annually. Usually, the numbers go as high as 70% to 90%.
Brokers don’t just make up these numbers to scare you into trading more cautiously. Rather, these figures are meant to give you a more realistic outlook on your chances of bagging profits from trading.
How Risky Is Forex Trading?
Imagine that the forex market is an ocean, and you are on a fishing boat (your trading account) trying to score a great catch (profits) before heading home. However, the weather conditions (forex prices) are constantly changing, not just by the day or hour, but by the second.
To make matters worse, the ocean is teeming with other fishing boats, many of them several times larger and more technologically advanced than yours.
There is no guarantee that you will have anything to show for your efforts.
Now, fishing companies (brokers) may offer to give you better fishing equipment (leverage) that can potentially help you catch bigger fish (larger profits). However, you failed to get a single catch even with your borrowed equipment.
The fishing company will now take everything in your fishing boat as compensation for your borrowed equipment.
In the above scenario, you can see how leverage trading in the forex market does not give any assurance that you will turn a profit. Instead, it showed that you can lose your entire capital (and even more).
When you enter a trade, always bear in mind the following:
- The forex market is highly volatile.
- There are always better traders than you and you are competing against them.
- You are more likely to make losses than profits when you trade.
- Your losses can exceed your capital investment.
Forex Trading Can Be Expensive
Trading currencies is not a hobby for people without an abundance of disposable income. If you’re struggling to pay rent or living paycheck-to-paycheck, forex trading is probably not for you.
Consider that the smallest trade lot you can enter (in most conventional brokers) is one micro lot. A micro lot is equal to 1,000 units of currency. This means you must deposit at least USD 1,000 in your trading account before you can open a position.
While not all brokers require a minimum deposit, you will still need a maintaining balance in your account to enable you to trade.
You can’t expect to potentially earn tens of thousands of dollars (or even more) without risking a few thousand yourself. And when you put your money on the table, be prepared for the very real possibility of losing it all.
Aside from the minimum balance, you must consider the spread costs, commissions, and other transaction fees brokers might charge you per trade.
If you don’t have a lot of disposable funds, you must think twice about whether you can afford forex trading.
Forex Trading Is Not a Source of Quick Cash
Trading forex successfully takes skills. These skills take time—and a lot of practice—to acquire. You can’t expect to become an expert forex trader in just a day or two.
If it were so easy to make money through forex trading, many people would be doing it instead of toiling away at their day jobs.
If you really want to make forex trading a steady source of income, you will need to put in a lot of time and effort. Practicing in demo accounts can help.
Now that you’ve put this sobering lesson about the realities of forex trading out of the way, you can proceed to the next lesson: the forex trading sessions!
