Wednesday, November 21, 2007

forex Trading - The BIG Disadvantages Of This Investment Medium

You will here about the advantages of currency trading and their well known but there NOT advantages unless - you trade currencies correctly. They can just as easily be disadvantages and that's what happens to most traders!

Here are the perceived advantages and how they cause traders to lose.

1. Currencies can be leveraged

Many brokers will now give up to 400:1 in leverage and while this allows you to increase gains - it's a double edged sword and can cause losses. Most traders have no idea of risk control over leverage themselves and lose.

Poor risk control is probably the major reasons traders get wiped out, they simply cant handle leverage and have no idea about standard deviation of price.

2. Currencies are volatile

Therefore profit opportunities present themselves everyday.

The high odds trades don't though and most traders simply trade low odds trades.

They trade far to much and end up losing furthermore, the volatility of currency trading has led many traders to try day trading which is simply dumb. There is no way you can get the odds on your side in day trading and they lose all their money.

In forex trading you don't get paid for trading often you get paid for being right and that's it.

3. Currencies trend

Yes they do - but the problem is of course you have to lock into and hold these trends and execute your trades at the right time. This looks easy going back on the charts but is much harder going forward!

The trends are easy in hindsight but catching the big long term trends causes emotional problems for most traders.

Why?

Because they cant hold a trend.

The reason for this is they get a profit and get so excited they want to take it before it gets away. The more the market moves in their favour the more excited they get. Then volatility starts to eat into their open equity and they snatch a marginal profit.

If of course they hung on they could have had a huge profit but mentally they couldn't cope with volatility.

As you can see an advantage is not an advantage until you turn it into one.

An advantage for some is a disadvantage for others and in the case of currency trading most traders can't make the above advantages work for them.

Of course with the right education and attitude you can but in today's world of experts and e-books promising traders riches beyond their dreams (all for a few hundred dollars) traders plunge in and burn their equity.

If you want to win keep in mind:

- Don't over leverage and execute proper risk control.

- Trade in frequently to catch the high odds set ups.

- Study volatility and standard deviation of price. - If you are trend following have the discipline to follow them.

The currency markets need to be treated with respect - that means proper forex education and an understanding of how and why they work and how to put the advantages in your favour.

The currency markets do NOT have advantages unless you make them advantages and they start off as disadvantages.

If you understand the above, you will realise what you need to do and if you do it get the right forex education and harness the advantages of currency trading.

If you do you could make a lot of money and enjoy currency trading success.

2 comments:

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