Editors note: Advertisers are not responsible for the contents of this site including any editorials or reviews that may appear on this site. For complete and current information on any advertiser product, please visit their Web site.
A post looking at the pros and cons of forex trading and what you need to look out for to keep your portfolio safe from the pitfalls of the foreign exchange market

A few months ago, I had a guest post on my site about trading the forex market, and I had a comment requesting how I should talk about the dangers of forex investing.  So because I am responsive (albeit slowly responsive, sorry!), here’s my post on the Dangers of Forex Investing.

Bear with me here, as I don’t know very much about forex investing as I personally haven’t included this type of investing in my Questrade portfolio.  Well, I guess except for some USD/CAD that I buy when the CAD dollar is up.  But it’s more for my personal spending when I go to the United States.

First let’s explain what Forex Trading is:

Forex stands for Foreign Currency Exchange.  Basically it’s the trading of the world currencies.  You buy a world currency, hold it for a period of time, and expect/ hope that it will rise in value.  When (or if) that happens, you sell it.  It sounds quite similar to buying and selling equities.  Except that it can be much more risky than trading with the conventional stock market.  Here are some qualities of the Forex market that makes it dangerous.

Qualities of the Forex market that make it dangerous for your wallet:

  • It’s open 24 hours of the day (more opportunity for you to lose money) except weekends
  • Many investors agree that this market is (very much so) based on speculation
  • The forex market can be largely affected by world news, politics, or anything that happens in the world (super volatile)
  • It is very technical and you will need to know the trading vocabulary before you even start
  • You will have to pay fees for any profits that you incur, as well as trading fees and commissions (the brokerages make money even when you lose money- they don’t really care)
  • Often the brokers will encourage you to leverage (borrowing money to make money aka “trading on margin”) and if you seal a wrong deal, you’re pretty much instantaneously screwed… big time
  • When you are encouraged to leverage, it can be huge (like for every $1 you have, you can borrow $100)
  • Large volume, high liquidity- this can be good or bad I suppose

There’s lots of forex day trading brokerages popping up these days, especially with it being so easy to do online.  Just be careful and make sure you don’t go head over heels and find yourself in investing debt =( If you are still interested in trading on the Forex Market, you should try a Forex Market simulator first (use fake money).  Also, I hear that they have Forex Robots that use algorithms to make the currency trades automatically, which might help take the panicky psychology behind currency trades, and help limit your losses.  Don’t be lured into “MAKE BIG MONEY FAST” gimmicks from the Forex Market.

Readers, have you invested or traded with the Forex Market? What are you thoughts on it?

Article comments

Aziz says:

I have been doing it for a while. I haven’t won because of my impulsive nature or greed should I say. If you are really diligent and skilled you can make a profit easily. Two very important things to be noted here. You can’t win trades with just 100$. You have to have at least 10,000 that you don’t need for your everyday use. Secondly, you need to find a good broker that is trustworthy and charges less fees. Try to use a demo account for at least a couple of months before going live. Make sure when you are in demo mode that you take screen shots of when you open a deal so you know at what price you have bought the deal. Some brokers manipulate the numbers and make you believe you have made profit. Really weird I know! Has happened to me. In the end, I would like to say that for me personally it was really stressful experience, you can’t eat well or sleep well because you are always concerned about losing which you will because the forex market is really volatile. I have heard that 95% people that start Forex lose the money they invest. Good Luck

Rube Vogel says:

“Money management boils down to risking 2-4% of your capital per trade. If you do that you need to lose 30 times in a row to blow all your money. Using a proper strategy that is just about impossible!”

This logic is the financial analogy of doubling up your bets at craps – each time you lose you bet double on the next bet. Funny how much the casinos just love people who play this strategy.

Oticon says:

I am really enjoying the theme/design of your site. Do you ever run into any web browser compatibility issues? A handful of my blog readers have complained about my site not working correctly in Explorer but looks great in Chrome. Do you have any advice to help fix this problem?

Sonic TV says:

This is a good, common sense article. Very helpful to one who is just finding the resouces about this part. It will certainly help educate me..

Oakley Black Friday says:

Thanks for this article is very good article. I have a great advantage. I think that would be useful to many people. Let’s put it this way again. Personally, I’m glad to get to know these stories. Wishing the author has lucky and happy.

Henk says:

There is a lot of money to be made on Forex. It needs understanding and lots of practice. You must get a ‘feeling’ for the market. It is true that 95% of people lose on forex but that is because they don’t understand, leverage. risk, money management etc and don’t have a strategy worked out.
There are a lot of technical indicators and ‘laws’ to be studied. It’s not just for climbing in and getting rich! Anything that is worthwhile takes lots of time. You don’t become a specialist instantly!
People blame forex for losing their money, in the meantime they have only themselves to blame.
Money management boils down to risking 2-4% of your capital per trade. If you do that you need to lose 30 times in a row to blow all your money. Using a proper strategy that is just about impossible!

Happy trading!

broker forex says:

Forex can be a great opportunity or a desaster experience. you really have to follow formation and be conscient that trading is not a game and can have risk.

Randy Rodenhouse says:

“Forex stands for Foreign Currency Exchange. Basically it

The scariest one here is the fact that it’s open 24 hours, especially in this recent market where there are market crashes left and right. I don’t want to go to sleep worrying that when i wake up, the currency I invested in went down the drain.

young says:

@Andrew @Money Crashers- I know eh? You really don’t know what will happen from day to day. Things are going on politically around the world every nanosecond. Scary stuff.

I started off with $50,000, went long Gold when it was still at $750 or so, and with the leverage, I am now looking at a very sweet several hundred thousand dollar gain…

… with play money, of course. 🙁

young says:

@Invest it Wisely- LOL! You had me fooled for a minute there, my eyes were widened like saucers.

Little House says:

This definitely sounds risky. It seems like you’d have to be really on top of world news and be terrific at predicting economies and their dollar worth. I don’t see myself doing this kind of investing anytime soon.

young says:

@Little House- Yeah, and who really can be on top of the world news? No one knows when things will happen (unless you are a spy, of course lol). I don’t think I will do this kind of investing either, it’s too risky.

You need to be glued to your screen in order to spot opportunities and identify exit/entry points.

This is no buy and hold type of investing unless you have nerves and deep pockets to trade off longer time frames.

A lot of the brokers out there are market makers who will take the other side of your trade.

I prefer stocks anytime over FX.

Mark says:

Zero-sum markets are definitely a bad deal. The only people that make money in Forex are the banks that convert your money for you while charging you 1% commission.

I do have exposure to other currencies though through non-currency hedging index funds.

Another note on Forex, the currency market cycle is so long so you could be in the negatives for a long time.

young says:

@Mark- Thanks for visiting. You’re so right about the only people making money in the Forex market being the banks doing the commissions.

@Beating The Index- Interesting you both have different view points on whether forex is buy and hold or quick trading. I haven’t touched FX myself at all, and don’t intend to. Stocks all the way baby!