Forex/Currency Trading

Forex trading has become one of the most popular ways for people to speculate with their money online. That being said, there are a few things that must be pointed out:

Most Traders Lose their Money

For some reason this statement is usually brushed aside, even though it is so very important. The number you will usually see is that only 10% of traders ever make any money. Then if you take into account how many traders actually make a full time living off of the activity... well I don't have this number, but it is very low.

If I were to say that most people lose playing online poker, this would not surprise anyone, but what would you think if I said that the two industries are actually very similar? They are similar in terms of the ratio of people who ever win any money. They differ, in that people feel like they are doing something wrong when they play poker, but doing something right when they trade forex. After all, you are trading in the worlds largest financial market... right?

Understanding What you are Doing

When you trade forex, you are gambling, no different to the gamble you take when you play poker. There is a very thin line between gambling and speculating, and it is very important for you to see it clearly. This distinction could potentially save you thousands of dollars.

What is Gambling?

When you take a trade and it has the potential to be a winning or losing trade, you are gambling. I'm sure you have your reason as to why you took the trade in the first place, but how many people can honestly say that they've never made money in a trade for the wrong reasons? You take a trade because of a technical signal, and then they unexpectedly raise interest rates, which leads to you making a lot of money. Had they not raised interest rates, you would have lost money, so was the trade really dependant on that technical signal, or was it dependant on the interest rate decision?

According to the efficient market hypothesis, technical trading does not produce profits in the long run.  Therefore it is more likely than not, that any gains that you see when using these 'systems' is nothing more than a natural movement within a predefined variance. In other words, you will be right on many trades even if you are a losing trader.

Can I be in that 10%?

They say only 10% of traders ever make any money, so can you do it? Possibly. I don't know you, your background, your goals or your education, so I cannot say that you specifically can be. However, I can assure you that out of every 100 people that start trading studiously, between 5 and 10 people will make money (5-10% to be conservative). Probably no more than 3 will become a long-term profitable trader. Please note that I have specified that these are studious, diligent traders. I can assure you 99.99% of people trading under a magical system don't make money, allocating that 0.01% to plain luck. It is also likely that the 0.01% will lose if they trade for long enough.

Moving from Gambling to Speculation

Once you understand that forex trading is no more gambling than playing poker, you might start to see where it can actually move into speculation. After all, the top poker players these days are mathematicians and accountants. Why? Because when they play, the odds are so clear that its not gambling any more, its speculating. In the long run, these guys will win, even though on any given hand they are actually speculating.

The same can be said with forex. Don't try and learn a magical system. Sure, read what some of these guys have to say, but don't think that one indicator or one fundamental piece of analysis will make you rich. Study! A lot! Practice a lot also, and then decide if its right for you.

What Kinds of Subjects do REAL Forex Traders Study?

As a basis, it is important for any trader to think mathematically. Only then can one be analytical. Focus your attention on economics as well. A very good understanding of supply and demand, the money supply and Monetary Policy are crucial places to start.

It is also important to learn to trade options and futures in addition to the spot market. These tools give your trading increased flexibility by allowing you to fulfill functions such as hedging and currency arbitrage.

An understanding of technical analysis will not hurt you by any means. It should be used as a tool, just as math is. The only thing that you must avoid at all costs is relying solely on technical signals.

Conclusion

If this interests you, then give forex a try. Don't get caught up in all of the hype. Everyone has some room in their portfolio for speculation. Some trade penny stocks, others play poker and maybe you will trade forex. As long as you have a positive expected value, you will be profitable in whatever activity you choose to take up.

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