The dark side of forex trading

The dark side of forex trading
07 December 2011

FOREIGN exchange trading has become more popular than ever, and you don’t need to look far to find endless websites promoting forex trading platforms and solutions that promise regular income and huge capital gains in short timeframes.

Unfortunately, many people who take the bait have no idea what they are getting involved with until it’s too late. So what’s it all about and what should you be wary of? Let’s take a look…

What is the forex market?

The forex market (also referred to as FX, foreign exchange or currency trading) is the world's most liquid over-the-counter market for trading currencies with approximately $3.2 trillion traded daily.

It is a decentralised market where banks and financial institutions act as buyers and sellers. The market is open 24 hours a day five days a week. Another factor that contributes to the uniqueness of this market is the leverage (usually 100:1) which enables you to increase your purchasing ability by 100 times the capital you own and want to invest.

Sales talk

Forex can be lucrative – but it can also lead to substantial losses.

Sales people in the forex industry depend on past currency movements to sell their products. They often tell stories about how much money the last movements in currency markets could have made an investor. For example: if you’d bought US dollars against the Euro in the past two months you would have made a fortune.

Most of the time, he or she doesn’t explain what would happen if the trade went against you.

The losers

More often than not, trades do go against people. From my ten years’ experience working in the forex industry as a dealer and analyst, I found that more than 90% of clients’ accounts got liquidated within six months of starting trading, sometimes in a shorter timeframe.

The winners

The big winners are always the brokers who had these accounts. It sounds odd that your broker makes money when you lose, while he or she’s supposed only to charge you commission on your trades, which means the more you continue trading the more the broker makes commission.

However, this is not the ultimate truth. You might have heard that market maker brokers are bad because they trade against you, but what does that mean?

In an unregulated and decentralised spot forex market, the broker is normally the main counterparty to its clients; the interest of the broker is obvious. This means they are doing the opposite thing from you, so if you are winning they’re losing: this gives them a vested interest in ensuring you don’t win.

They also employ various tactics to make it harder for the trader – providing skewed quotes and wider spreads all add up to make it very difficult for the trader to profit.

Art form

However, this is not the only reason why most traders fail. In fact, forex is an art form that requires lots of studies, research and discipline. The majority of traders who jump into this market don’t take sufficient time to educate themselves.

Some institutes provide two- or three-day training courses, assuring customers that they will become professional traders in that time, when it could take months and months to discover how the market works and devise trading strategies.

Free trial

My aim is not to blame the forex brokers, but to highlight the dark side for many beginners, inexperienced traders and anyone considering trading currencies. Before opening a real account take enough time to educate yourself. There are plenty of free websites where you can gather information on forex fundamentals, technical analysis and trading strategies.

Try it for at least six months on a demo account. If you succeeded, then you can move to a real account. Otherwise, this market is not one for you.

Pic credit: FreeDigitalPhotos.net

Have you tried out forex trading? How did you fare? Tell us your experiences...

Comments

No comments.

If you are registered you need to log in to comment, if not, please sign up.

Author
Wealth manager
Globaleye
Facebook Feed
Related articles