Wise Investors Stay Away From The Forex Market
2009 April 3
Perhaps the title is a bit dramatic so let me say upfront: it is certainly possible to make money in the Forex (Foreign Exchange) market. There are professional Forex traders out there who make a decent living at it, but they are the exception rather than the rule. For a variety of reasons to be discussed below, the vast majority of investors (I would say over 99.99% of them) would do well to stay as far away from the Forex, futures, and other commodities markets as possible.
Reasons To Avoid The Forex Market
- Too Much Leverage – There is a very good reason you aren’t allowed to borrow more than 50% of the purchase price of a publicly-traded stock, by law: to prevent you from shooting yourself in the foot and dragging innocent bystanders down with you. 2:1 leverage is bad enough if you make a poor trade, but in the Forex market there are practically no regulations limiting the amount of leverage you can theoretically have. It is not unheard of for traders to leverage up to a ratio of 10:1, 20:1, or even higher. Be honest: do you really have the discipline to manage leverage without going overboard? I don’t.
- Extreme Volatility – The unfortunate side-effect of this abundant liquidity is extreme volatility. While this does present profit potential to experienced traders, it’s a veritable mine-field for small, under-capitalized investors who can’t afford to remain properly-diversified.
- Lack Of Transparency – The Forex market is unregulated and thus fertile territory for scams promising over-night riches. As a consequence, it’s nearly impossible to find information you can really trust as accurate and unbiased. Lack of transparency is a huge risk factor in any market.
- Unbelievably Complicated - Practically anything and everything influences currency fluctuations from government policies to the discovery of a new oil well to the whims of finance ministers, which are often completely unpredictable and random. I have a hard time believing most professionals could keep up with all the relevant details. Small investors with a day job haven’t a chance in the world.
- Resistant To Individual Influence – A visionary executive of gifted engineer can bring an otherwise-moribund company to life, restoring profitability and sending the stock price through the roof. If you can identify talent in advance, you have a chance of reaping large returns for relatively little risk. The success of economies and their currencies are dependent on far too many obscure factors to be subject to the influence of a single individual, or even small group of them. Thus, their success or failure is more difficult to predict.
Put it all together and you have a recipe for disaster for the small, inexperienced, but greedy investor. Invest at your own risk.
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You could identify fundamental trends in the FOREX markets. With hindsight back in early 2008 some investors were buying higher yielding currencies like the British Pound and selling lower yielding ones like the Japanese Yen for the so called carry trade. As many hedge funds piled in and as major banks worldwide cut interest rates one could have profited from doing exactly the opposite of what the herd was doing.
One other thing to add – with forex it is virtually impossible to wake up and learn that a country like UK, US, Japan etc had phony accounting like Enron for example.
What template did you use in your blog ?