Should You Be Trading the Forex Market?

Imagine you’re a trader in the Foreign Currency Exchange Market (Forex) and you are currently involved in a trade where you’ve shorted the Euro against the US Dollar. Your account had a total current value of $100,000 before placing your trade. Following what we believe to be an essential risk management rule, you have risked the maximum $2,000 (2% of $100,000) on this one Forex trade. After getting a good night’s sleep, you wake up in the morning and the first thing you do is login to your brokerage account and check out your trade. Remember, unlike the stock market, the Forex market is open for business 24 hours per day, 5 days each week. So a lot can happen while you’re sleeping (and while you’re awake). Wow, your account is up over $5,000 since you put on the trade a day or so ago—that’s a whopping 250% return on your investment!

forex trader

Waking up in the morning to a Forex trade is an interesting experience

Later in the morning, a major U.S. Federal Reserve announcement is scheduled (which could greatly affect your trade), but after careful consideration you decide to keep the trade on. Within minutes after the announcement, your profit jumps up to $10,000! You’re excited, but because you are a great trader, who doesn’t get caught up in their emotions, you don’t let your excitement cloud your judgment. You set your stop-loss (an order within your brokerage to get you out of a trade at a certain predetermined price) to a break-even level—meaning your only reasonable risk now is the $10,000 profit you currently have in this trade. Feeling a little anxious, but trying to remain calm, you decide to go make a cup of coffee.

When you sit back down with your coffee, you notice your account size looks a little smaller. Next thing you know—within just a few more minutes, the trade is closed out—the automatic stop-loss you set up was triggered and an order was executed. You have now given back the entire $10,000 profit you saw before that cup of coffee. All the energy that went into that single trade turned into a trade that broke even. An alarming reminder that the Forex market can be extremely volatile after a major news announcement.

EURUSD Short trading the Forex market

This Euro/US Dollar trade went from a profit of $10,000 to break-even in less than 20 minutes.

Let’s review what has just occurred. You originally risked $2,000 to realize a potentially large profit—you saw the profit—and then you let it all slip away. Was this a mistake? Did you handle it incorrectly? Or, was this just a random and rare movement in the foreign currency market?

No, no and no. Depending on your risk management rules (which we believe is probably the single most important component of making any type of investment—Forex or not), this trade is a common occurrence that was probably handled correctly. In fact, closing out the trade just because you had a large paper gain would have most likely been the wrong move for you.

You mean to tell me that getting out earlier with some or most of the $10,000 gain would have been the wrong move? Yes, in the long-run, closing out a trade in that position would not be the right move because money is made in the Forex market by letting winning trades continue their run. Closing out a trade like that just because you’re excited that your trade has moved a lot in a favorable direction is absolutely the wrong decision. It’s definitely not a habit of the intelligent and disciplined trader. Forex is a highly trending market that rewards you for hanging on to trades just like the one in this example, especially in the face of high emotion and large gains or losses at risk.

 

Is Trading the Forex Market for You?

The Forex market is definitely not for everybody. If the above example gives you a stomach ache, causes you extreme uneasiness, and sleepless nights, then it’s probably best not to be involved in it. If you are the gambling type that thrives on the thrill of money at risk, with the potential to bet it all—then you absolutely should not consider trading the Forex market. It’s not for gamblers, and it’s not for the faint of heart. It’s only for those who fully understand how probability affects outcomes. If you have the right system, and apply the rules consistently, the probability is high that you will earn a great return over time. But in the short run, you might go underwater for extended periods. You must be prepared to trade in this market. It’s for those who realize that the house in Vegas always has the edge—and they want to be the house.

forex risk

Forex is considered a risky way to invest…but there are certainly ways to mitigate that risk with the right knowledge.

This market has the potential to make you a lot of money, or cause you to lose a lot of money. You need to weigh the costs and benefits of getting involved very carefully. Talk with us about the experiences and possible outcomes that you need to expect when trading this market. We’ve been there and our coaches know what it takes. If you think you might be a good Forex candidate, read on—and enjoy the ride. It is a very exciting and lucrative investment market with lots of opportunities to make great returns for many people. If you feel you can handle the risk, control your emotions, and develop the proper discipline through education, practice and implementation—it will be well worth it. We recommend it and work with people on it when they can truly commit to it. Let’s go over some of the main things you should know and initially consider about the Forex market.

 

5 Points to Consider About Forex

1) Leverage

The Forex market is a highly leveraged market (up to 50:1 in the United States) that gives you the ability to make a lot of money in a short amount of time with a relatively low amount of capital to invest. However, we believe it should be used to leverage the money to your advantage, by risking only very small amounts of your account at any given time. The leverage gives you the capability to invest with a smaller amount of capital in your account, but you must always know the full amount at risk at any and all times. It should only be traded when you combine the right strategy and the proper risk management techniques—with a whole lot of discipline mixed in. You can use the leverage safely and efficiently with the right education. But be fully aware that it’s a double edged sword that can go against you very, very quickly if you aren’t willing to take the necessary precautions.

 

2) Studying  

It takes some time to study and learn this market. You can’t take a class, read a book, or jump in the live market and hope to make money immediately. It takes experience, practice and proven strategy and techniques to master. After you learn it, you should always paper trade before using real money. Paper trading is using demo accounts with virtual money, to mimic what the market and your broker does. It’s no substitute for placing real trades with real emotions in the live market, but it is a necessary process which will get you thinking like an effective trader. Forex is never to be used for a “get rich quick” scheme. We don’t believe any market should be treated or is designed for get rich quick strategies.

 

3) Strategies      

There are different strategies to consider when trading the Forex market. It all depends on the size of your account and the amount of time you have to commit to it. We work with clients on short-term strategies, short to mid-term strategies, and long-term strategies. Each one requires the same type of thought process, but a different type of execution. Short term strategies require more time, but can be done with less money in your account. Longer term strategies don’t require as much time, but usually a larger account with very significant drawdowns. It ultimately depends on your needs, risk tolerance, and your current financial situation.

It’s also important to know that you should be relaxed and not under tremendous financial or other personal pressure in order to succeed in this market. It takes a strong person to succeed in Forex and trading it while sick, stressed or distracted is not the optimal path. It should only be done with money you can afford to lose—otherwise your decisions are easily swayed by outside influences.

 

4) Honesty      

The Forex community is running rampant with scams, lies and deceptions. It’s amazing what is written and sold on the internet to people who are naive when it comes to this type of investment. You need to locate and sort out the right information in order to learn this market. Unfortunately, we believe most of the strategies and information being presented online, even from reputable brokers, are not the right approaches at all. We talk to and have worked with far too many people who jump in prematurely—and consequently end up losing everything.

Trading the Forex market is still a relatively new thing for retail investors like you and me. Until the early nineties, before retail trading platforms were available online, only banks and other financial institutions could place trades in this fast-paced market. Because of this, it is still trying to find its place within most investment portfolios. Despite what you might hear, you will not make 10,000+ percent returns year in and year out. That’s just unrealistic and anything you read online saying otherwise is misleading you. Brokers, trainers, and self-proclaimed ‘Forex gurus’ are doing anything they can to get your money. Don’t believe the outlandish things they say. If it sounds too good to be true—it probably is. You can potentially make some large money, but you must control your risk while doing so. Don’t get scared off by some of the deceptions out there, but tread the Forex waters carefully. Learn from professionals you trust, and only invest with good, proven Forex brokers. You won’t learn it all in one expensive seminar, but you can learn it with a relatively small amount of concentrated effort with proper assistance and guidance.

 

mindset

Your mindset is a huge factor in Forex. It is what will determine how successful you will ultimately be

5) Mindset

Mindset, attitude and discipline play a bigger part in this market than all the other ones combined. As shown in the example to start this article, the Forex market is fast—and you need to be able to have your plan, act quickly, and execute it. One wrong move, hesitation, or oversight can make a huge difference to your bottom line. Trading this market must be treated like a business. Losses in your account are just a cost of doing business, much like food is a cost for restaurants to turn a profit. If you don’t employ that necessary mindset, bounce back from losses, and maintain the proper will power and discipline—results will probably not be ideal. It’s vital to be on the proper track, and we will help get you there, if and when you need.

 

Final Thoughts

As you can probably tell, we want you to fully understand and appreciate the potential dangers—as well as the immense benefits—of trading the Forex market. This article is meant to be a very preliminary introduction to this market and it provides only a glimpse of what is required to succeed. If you’ve made it this far and still want to be involved with it, or learn it even better than you already do, that’s great. We know that it opens up a whole new world of possibilities for those who are ready to make the commitment it takes.

We’ve barely cracked the surface. There is much to learn about the market, its components, the rules, strategies and tricks to succeed. Book a free game plan session, read our other articles, and send us questions to learn more. We also offer a weekly webinar where we examine the current market and plan for upcoming trades. We’d love to help guide you in your Forex journey any way we can.

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Kevin Tudor is the VP of Investment Training for Margin of Safety Investing, LLC. After a significant amount of time in the financial services industry, Kevin moved on to investment research and analysis to bring his expertise to the individual investor. He now resides in Scottsdale, Arizona where he conducts online webinars, writes financial newsletters, and provides various methods of investment training to show others the key strategies to successful investing.

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