The Dangers of Forex Investing

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:

  • Foreign Currency Pictures, Images and PhotosIt'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?

16 Comments

  1. Mark on September 27, 2010 at 12:09 pm

    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.



  2. BeatingTheIndex on September 27, 2010 at 2:20 pm

    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.



  3. young on September 27, 2010 at 6:30 pm

    @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!



  4. Little House on September 28, 2010 at 6:55 am

    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.



  5. young on September 28, 2010 at 8:30 pm

    @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.



  6. Invest It Wisely on September 30, 2010 at 7:53 am

    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. 🙁



  7. young on September 30, 2010 at 9:20 am

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



  8. Andrew @ Money Crashers on October 10, 2010 at 4:07 pm

    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.



  9. young on October 11, 2010 at 1:14 am

    @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.



  10. Randy Rodenhouse on October 29, 2010 at 7:48 am

    “Forex stands for Foreign Currency Exchange. Basically it



  11. broker forex on February 19, 2011 at 3:22 am

    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.



  12. Henk on July 30, 2011 at 7:03 am

    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!



  13. Oakley Black Friday on November 7, 2011 at 6:25 am

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  14. Sonic TV on November 10, 2011 at 8:00 pm

    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..



  15. Oticon on April 17, 2012 at 8:41 pm

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  16. Rube Vogel on October 30, 2016 at 12:52 am

    “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.



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