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Sunday, March 12, 2017


Why Trade FX?

The main reason to trade FX is to make a lot of money very fast. The ability to make a large return in a short period of time is a function of a fast moving market and leverage. FX prices are measured in points, so that in futures a ten-point move in the Canadian dollar is worth $100. If the average daily move in the C$ is 100 points and if you do everything exactly right, you can potentially make $1000 per day.
And you can do this by putting in a capital stake of only $4000, so you could conceivably make a 30% return every day. You can do the arithmetic—if you did that every day in a 240-day trading year, you’d have $240,000, or a return of 60 times your stake. You are able to do this because the contract you are trading is for a face amount of about $100,000, but you have to put in only about $4000. The broker is lending you the remaining $96,000 but if you win, you get to keep the entire gain. The broker takes only fees and commissions, or hides the fees and commission in the bid-offer spread.
This example is crude (and the numbers are only approximate) but they illustrate the point—the main reason to trade FX is greed. If you are like most people, who saw their savings in equities barely return to 1999 levels in 2010, trading FX sounds like a very good idea.
Like all things that sound too good to be true, however, trading successfully takes years of training and work. Many beginners do indeed make a bundle in their first forays, but hardly anyone manages to keep it. We are going to address this below and in our discussion of methodology.
The second reason to trade FX is that it’s more fun than another security. In the days of the tech boom, “idea stocks” were interesting, but FX offers an endless array of fascinating stories to trade on. FX market fundamentals range from the behavior of Japanese housewives to Big-Picture macroeconomics to foreign affairs. FX is the first and the last security to respond to world economic and financial events. When Lehman Brothers went bankrupt in September 2008, the currency market moved over 10% within the space of a few months. Again, when you are using trading leverage of 60X, that’s a potential return of as much as 600%.
You can’t trade currencies without knowing something about bonds, equities, gold, oil and sometimes other securities, too. FX is the top of the securities heap, the most sensitive barometer  of global sentiment.
Having said that, trading on Big-Picture macroeconomics is a really bad idea that hardly ever works. You have to know the information without letting your ideological bias dictate your trades. For one thing, dispassionate objectivity is very hard to find, in yourself as well as in others’ commentary. For another, traders are acting on their own interpretation of global affairs and they can be wrong. You still need to follow the crowd and trade with the “idea of the day” even though your superior analysis tells you the crowd is wrong.
The purpose of trading is to make money, not to prove that you are “right” about some geopolitical event.

It’s nice to be holding a currency position when the price shoots the moon. Sometimes the forex market delivers 500 points in a single session. At (say) $10 per point, that’s a gain of $5,000 on a capital stake of as little as $2500, or 200%. 
This is why so many Chart Hucksters are out promoting forex as a way to get rich quick. One broker advertises on the Reuters website that “Trading the euro is easy!” They claim they can identify in advance when big moves like this are going to occur. If anyone really did have such a secret, they sure wouldn’t be selling it to anyone, let alone you and me—they would be trading it themselves.  
Then there is the Big Picture Guru who claims that his deep analysis means a big move must logically be in the works. The Guru neglects to tell you that he personally has never made a dime from his profound economic analysis and gets all his income from selling it instead of trading it.
This doesn’t mean the Chart Hucksters don’t have some good ideas worth learning or that the Big Picture Gurus don’t offer real food for thought. It does mean their goal is not to help you make money trading—it’s to sell reports.
Unfortunately, there is no fast and easy way to learn trading. Pretend for a moment that you don’t know how to cook. You sign up for a cooking class that will consist of 15 sessions of three hours each, or 45 hours. By the end of that time, you will know how to do more than boil water, but you will not be qualified to solicit capital from investors and open a restaurant.
Beginning traders are usually not willing to commit even 45 hours of time to learning how to trade, and yet an ounce of common sense should tell them that 45 hours is a bare minimum. To achieve real mastery in any endeavor takes 10,000 hours, according to Malcolm Gladwell in his book Outliers. Ten thousand hours is a huge amount of time—250 weeks or almost 5 years at a full 40-hour week.
Most people can’t make that commitment–but they forge ahead anyway on a wing and a prayer. They are desperate to make a little extra money, or they find trading entertaining, or trading feeds their adrenaline habit, or trading makes them feel important and connected to the world of finance, or trading provides a social networking opportunity.
No wonder most beginning traders lose money.
But here’s the good news. Education is cumulative. If you are persistent and work with true concentration, you can get to a high level of trading competence in less than 5 years. You won’t be a master, but you will make more money than you lose. It helps if you have certain personality and character traits, but not essential. Anyone can learn to trade successfully. But it won’t be instant and you won’t get rich quick. 


Saar Pilosof said...

Nice post... Trading is never easy and choose right trading platform is very important. To avoid any problem hire broker wisely.

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