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Forex Trading: Great Opportunity or Scam?

by: Steve Pickering

A lot of interest has been generated recently in FOREX trading, hailed by some as the great new investment opportunity. There are even companies running TV infomercials, offering sure fire systems that will bring massive profits in an easy fashion.

So what is forex? Is it something new? The exchange of currencies is said by some to be the world's second oldest profession and as long as there have been two sovereign states that have issued their own currencies, there has been foreign exchange as a facilitator for trade.

Forex, as foreign exchange has been abbreviated to, has been conducted for centuries and has become a global market with a daily turnover according to a recent Bank for International Settlements survey of $1.9 trillion (billion, billion) per day. Essentially it is a global market place with no physical exchange building where all claims on foreign currencies are settled - between governments, corporations, investors and speculators among others. Banks have traditionally been the middlemen who provide the liquidity to this gigantic market, which incidentally is traded on an almost continuous 24-hour basis.

Then came the Internet and suddenly it became possible for everyone to get a piece of the speculative action. Brokers sprouted up with their electronic trading platforms and high 'leverage'. Essentially the brokers lend clients funds to speculate with, 100:1 or in some cases up to 400:1 ratio, or leverage. This means that $10,000 can 'control' up to $4,000,000 in the market. This is far higher than is possible in the stock market.

Many people have been attracted to the possibilities of earning fast profits from forex. There are often sharp movements that can turn your $10,000 to $20,000 in a matter of minutes. You can also get wiped out, but the lure of a fast buck has turned would-be speculators into out-and-out gamblers.
The Internet has also made it possible for the individual to obtain so-called 'charts', that allow them to do 'technical analysis' on their own PCs. The theory is that price movement patterns repeat themselves, so if you have a system of analysis, you can predict a future move in the market.

This may well be the case, but it does not address the problems of the psychology of trading - the fear and greed that drives many to irrational behaviour. People are often taken in by the seller of a system, often paying $5,000 for a piece of software that shows a green light to buy and a red light to sell. However, they don't tell you how to manage your money.

So speculators lose. It has been estimated that 90% of new investors in forex lose their capital in the first year - an appalling figure. What can one do to avoid being a victim? Well, forex is a business like any other business and planning is required. It is also a profession and as such, adequate training is necessary so that you understand fully what forex trading is all about.

Many are prepared to invest thousands in forex trading without really knowing what it is all about. Just think if franchises were offered in a major hamburger chain without the franchisees having a clue how to run a restaurant or even make the burgers. The failure rate would also probably be 90%!
As with all investing, it is all a matter of risk and reward. Investing in Government securities is considered low risk, therefore they carry the lowest return. Increase the risk (the probability of loss on the investment), the higher an investor is rewarded in terms of return. An individual trading forex decides his own level of risk, which should dictate the level of reward. However, in the hands of an inexperienced trader, the two factors are impossible to reconcile, meaning in stark terms that traders cannot control the risk or the reward levels.

People attracted to forex trading often have an unrealistic expectation of what can be earned. To start with an investment of $5,000 and expect to be making $100,000 a year after the first year is unrealistic. It is not impossible; then again, neither is winning the lottery.
If the parameters for trading are laid down and adhered to combined with knowledge of forex trading, success is possible. It does not take much in the way of 'enhanced' returns to be able to double an investment. 26% per annum is required to double your investment within 3 years.

Who is going to teach you? There are some very good courses available, but these will only give you the theory, in itself very important. The ideal way is to have a mentor, or guide to show you the way.
Getting mentored is a wise move because it makes it possible to draw on the experience of a veteran expert and avoid making the common mistakes that cause the unwary to suffer catastrophic losses. After a while under guidance, a forex trader will gain the experience

The bottom line is that forex is not in itself a scam. There are for sure scam artists who prey on individuals' greed as there are in any other business. If it is approached in a sensible and realistic manner and the trader is prepared to work hard, forex can provide a good living both financially and materially.

About the author:
Steve Pickering is founder and owner of Forex Trader Mentor and has been engaged in the forex markets since 1971.

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Forex: Benefits of Trading the Forex Market
by: Raul Lopez

Trading the Forex market has become very popular in the last years. Why is it that traders around the world see the Forex market as an investment opportunity? We will try to answer this question in this article. Also we will discuss come differences between the Forex market, the stocks market and the futures market.

Some of the benefits of trading the Forex market are:

Superior liquidity.

Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with nearly 2 trillion dollars traded everyday. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.

24hr Market.

This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.

Leverage trading.

Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position.

Low Transaction costs.

Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.

Low minimum investment.

The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.

Specialized trading.

The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better.

Trading from anywhere.

If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.

Some of the most important differences between the Forex market and other markets are explained below.

Forex market vs. Equity markets

Liquidity

FX market: Near two trillion dollars of daily volume.

Equity market: Around 200 billion on a daily basis.

Trading hours

FX market: 24hr market, 5.5 days a week.

Equity market: Monday through Friday from 8:30 EST to 5:00 EST.

Profit potential

FX market: In both, rising and falling markets.

Equity market: Most traders/investor profit only from rising markets.

Transaction costs

FX market: Commission free and tight spreads.

Equity market: High Commissions and transaction fees.

Buying power

FX market: Leverage up to 400:1.

Equity market: Leverage from 2:1 to 4:1.

Specialization

FX market: most volume (85%) is made on major currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD.)

Equity market: More than 40,000 stocks to choose from.

Forex market vs. Futures market

Liquidity

FX Market: Near two trillion dollars of daily volume.

Futures market: Around 400 billion dollars on a daily basis.

Transaction costs

FX market: Commission free and tight spreads.

Futures market: High commissions fees.

Margin

FX market: Fixed rate of margin on every position.

Futures market: Different levels of margin on overnight positions than day time positions.

Trade execution

FX market: Instantaneous execution.

Futures market: Inconsistent execution.

All this makes the Forex market very attractive to investors and traders. But I need to make something clear, although the benefits of trading the Forex market are notorious; it is still difficult to make a successful career trading the Forex market. It requires a lot of education, discipline, commitment and patience, as any other market.

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