Trading currency in the foreign exchange market (Forex) is fairly easy today with three types of accounts designed for retail investors: standard lot, mini lots and micro-lots. Beginners trying to succeed in the financial markets can get started with a micro account for as little as $50; some brokers provide a very high leverage, up to 500:1 that can multiply the amount of money you can use to place a trade. But this high leverage can also work against you if the trade you’ve planned goes against you.
As a beginner, you will not have too much experience as a Forex trader or a Stock trader. What will probably happen? You will start devouring information about the financial markets, currency exchange, stock exchange, and how to trade with little capital as a beginner. You will Google for information on how to trade as a beginner and use YouTube to search for videos that can teach a beginner or newbie how to trade Forex. As a result, you will start understanding how the Forex market works. Still, you will also be driven by many Forex educators to trade by using one of their strategies, usually using all kinds of lagging indicators and colourful charts telling you when you can buy and sell. See the chart below, it’s not an exaggeration. There are Forex beginners that will have so many indicators and lines on their charts that they will not see what matters the most, the price action itself.
As a result, you will be immersed in the world of lagging indicators because as a beginner in the financial markets, you will believe what others have to say about it, including me. You will read many books, subscribe to many online financial services, and probably sign up for some signal services.
Hopefully, after a few months, hopefully not many years…. you will start wondering whether it’s true or not that Forex trading can make you rich as a beginner or even as an experienced trader. By reading all kinds of articles and websites, you will start believing that, as a beginner, you could easily double or even triple your initial investment quickly. That’s completely unrealistic; put your feet on the ground and think about it for a minute. Although our instinctive reaction to that question would be an unequivocal “No, Forex trading cannot make me rich.” we should qualify that response. Forex trading may make you rich if you are a hedge fund with deep pockets or an unusually skilled currency trader. But for the average retail trader and beginner trader, rather than being an easy road to riches, Forex trading can be a rocky highway to enormous losses and potential penury.
The most common mistake made by Forex beginners is the excessive leverage used in their trades. Although Forex currencies can be volatile, violent gyrations like that of the Swiss franc back in 2015 are not that common. For example, a substantial move that takes the euro from 1.20 to 1.10 versus the USD over a week is still a change of less than 10%. Stocks can easily trade up or down 20% or more in a single day. But the allure of Forex trading lies in the huge leverage provided by Forex brokerages, which can magnify gains and obviously losses as well.
As a beginner in Forex trading or any other market, you will be missing the information edge: The biggest Forex trading banks have massive trading operations that are plugged into the currency world, creating new supply and demand imbalances and have an information edge that you will never have, for example, commercial Forex flows and covert government intervention that is not available to the retail trader.
Do not forget about market manipulation. As a beginner in Forex trading, you might not believe this, but there have been occasional cases of fraud in the Forex market. Market manipulation of Forex currency rates has also been rampant and has involved some of the biggest players. In May 2015, four major banks were fined nearly $6 billion for attempting to manipulate exchange rates between 2007 and 2013, bringing the total fines levied on seven banks to over $10 billion. You don’t need to learn many full details about these cases because you have no control over there.
If you still want to try your hand at Forex trading and you are a beginner, it would be prudent to use a few safeguards: limit your leverage, keep tight stop-losses and use a reputable Forex brokerage. On top of that, forget about reading books on several forex trading strategies and forget about indicators and signal services. The financial world and the world revolve around supply and demand, as simple as that. These Forex brokerages cannot fill huge orders at once because it will change the market and be filled at undesirable prices. You do not need a PhD in economics to know that. You would do the same if you were a professional trader or fund and needed to fill many orders in the live markets.
Although the odds are still stacked against you as a beginner in Forex trading, I hope that at least these ideas may help you level the playing field to some extent. If you want to learn more about how to trade Forex using supply and demand imbalances, join our Forex trading course. You will learn where to plan your trades right, where the professional investors are planning theirs. Your stage as a beginner in Forex trader will be shortened by ignoring so much useless information being sold by hundreds if not thousands of Forex trading educators trying to convince you that their specific combination of indicators will make you rich overnight.
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