Why would you trade forex?
Or what is forex? Foreign exchange, i.e. currency markets, you may read more on wikipedia (new window will open)
Benefits and opportunities of forex trading
- You can make money independently from what is happening in a stock market (with forex you go for absolute returns, not vs. the stock market, you are like a hedge fund manager)
- You can always close your position without impacting the market (whatever position size you trade as long as you are a retail trader; the market is so big that your order has no impact). This is important. It means that your stop loss or take profit orders will usually be executed at the price you set (there are exceptions, but this is nothing compared to less liquid stocks)
- You can manage your risk very well. Yes, although you may have heard “forex is risky”, the truth is that if you know what you are doing and follow some simple rules, you can manage your risk very well. You can upfront and exactly decide how much you are willing to lose on a given trade by using the stop loss orders and right position sizing strategy (e.g. adjust lot size in a way that you loss per trade will be just $50 – this is easily possible with brokers with microlots)
- It is a simple market. Note I did not say “easy”… making money trading forex is very hard, but it is simple in a way that you have just a currency pair and exchange rate. No dividends, no earnings reports, no splits, no daily opening gaps. You just have economic news, rollover and price. Forex is simpler than stocks.
- You have 100+ currency pairs to choose from, to look for trading opportunities. You can also focus on just top 5 majors.
- You can use any timeframe, from 1-minute/5-minute combo to daily/weekly. I strongly recommend hourly and above.
- You do not need a lot of capital to get started, unlike with stocks, thanks to leverage. $1000 is enough to start with, and use microlots account and loose no more than $20 per trade (i.e. 2%).
- You can find your own way of trading. Your “system” or method, approach, strategy. Whatever we call it, it is your own approach. In fact, is is said in many books that this is the only way to become consistently profitable.
- Your results totally depend on your decisions! This might be the best of all. You do not depend on your customers, employees, management, not even your broker or FEB chairman or the market. Your results are always a reflection of your own trading decisions! This is a business where you have the full accountability, very clearly.
- You can lose all your account deposit or even more. This is likely to going to happen if you violate the risk management rules, such as always use a stop loss (at a broker) and correct position size (number of lots traded). But isn’t it the same with any market? Just that, with non-leveraged markets, if you do something irresponsible, it will take longer to loose all the money. In forex you can blow the account in hours… but again… only if you do irresponsible things such as using full leverage and trade huge position without a stop.
Let me make this question ever broader: why would you trade any financial market? (such as forex, stocks, bonds, commodities)
I will not say here, like in many other places, that you can soon become a pro trader, say bye-bye to your job and become a full time pro trader and trade for living. No. This is extremely hard.
What I am going to say is this: with right dedication, putting some hours of work every day or week, for a couple of months or years, you should be able to achieve a double digit returns every year, regardless of market type, with drawdowns no larger than 15-20%, on a trading capital that you put aside.
If this is not compelling enough, it may be that forex trading is not for you.
But if you have passion for the markets, by all means go ahead and work to learn to become a profitable forex trader.