Don't trade Forex: Why it's not worth your attention
By The Forex Review - 15 / June / 24 276
Dominick Bell
In many tweets, posts, courses and articles, Forex traders claim that Forex is the "easiest low hanging fruit" in trading. The reason is simple: they believe that stocks are more reliable than any other market and that profitable trading strategies can be developed from it.
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Reason 1: Leverage
The most important reason why you should avoid Forex trading is leverage. This point is extremely important. More traders lose money in the Forex market because of leverage than any other reason.
Most Forex traders trade with leverage because they have no other choice. With only a few thousand dollars of trading capital, your options are (very) limited. If you are trading an asset because it is your only choice, you should stay away from it or at least reconsider your decision. Forex brokers willingly offer their clients leverage of 50 times their deposit amount. The slightest movement can lead to a crash.
What are the risks of crash trading
In general, leverage is a Forex trader's worst enemy. With high leverage, there is no chance of going through a learning curve. Remember the quote from Victor Niederhoffer's book "Educating the Speculator". In other words, your goal is to lose capital. There will always be a fool to replace the losing trader.
Reason 2: Influence of small movements
With leverage, the slightest movement can turn your trade into a temporary winner or a permanent loser. You only pay a fraction of the cost of the trade, but you are still responsible for the full value of the trade. If your leverage is 50 times your capital, a move of just 2% can drive you crazy! In fact, this is the reason why most traders quit trading.
When traders begin trading, they dream of getting rich because a 2% move can double their meager capital. If they are lucky enough to double their capital, they lose it on the next trade. Losing all their capital is almost inevitable.
Let's take a look at the CFD market statistics:
- 58% of retail investors lose money when trading CFDs with Interactive Brokers.
- 65% of retail investors lose money when trading CFDs with SaxoBank.
- 67% of retail investor accounts lose money when trading CFDs on eToro.
- 71% of retail investor accounts lose money when trading CFDs with CMCs.
- 72% of retail investor accounts trading CFDs incur losses on 500Plus.
- 81% of retail investor accounts trade spread bets on IG and incur losses.
Reason 3: Exchange rates are very volatile
Exchange rates can fluctuate wildly even over short periods of time. There is a significant investment risk involved here, as fluctuations in exchange rates can be catastrophic and you can suffer losses. This is also where leverage can help!
Reason 4: The foreign exchange market is a zero sum game
The foreign exchange market is a zero sum game. There is no opportunity here to capitalize on inflation and long-term growth in returns like in the case of stocks.
In the case of stocks, at least based on historical returns, you get a "free" daily return of 0.04%. As discussed in our article on the benefits of evening and night trading. Forex is a relative relationship between two (political) economies: unless there is a revolution or hardship, stocks become a very good source of wealth; Forex, on the other hand, cannot be bought and held! You cannot build wealth over time!
Reason 5: Currency market is very difficult to predict
Predicting future exchange rates is very difficult! There are many reasons why certain currency transactions happen: importers, exporters, speculators, hedgers, price manipulation by central banks, Russian money laundering, etc. This makes Forex volatile and hard to predict. But in the long run, purchasing power parity works very well.
Since the Forex market depends on billions of factors, it is completely useless to make predictions. All our research shows that the best Forex market forecast is the sum of future rates N months ahead. This is a better forecasting method than almost all economists and consultants.
Reason 6: Limited protection
Given the volatility and unpredictable movements, no risk management system or strategy will help you (in the long run). You may even have to pay a premium to execute stop loss orders!
Reason 7: The Forex market is full of scammers
Like all other markets, the Forex world is also full of fraud and embezzlement, but not as often as the world of Forex brokers. However, it does not happen as often in the world of Forex brokers either. Offers and advertisements that seem too good to be true most likely are. Read what the CFTC (Commodity Futures Trading Commission) has to say about currency trading fraud.
Reason 8: Service Provider Risk
If your provider goes bankrupt, you may not get your money back. Every transaction has a counterparty (a party involved in the transaction on the other side), and that party may not be able to fulfill its obligations. This is the counterparty risk. The foreign exchange market is less regulated than the stock market.
Reason 9: Twenty-four hour market
Since the market is open 24 hours a day, you may be tempted to trade more than you should. This leads to excessive trading.
Reason 10: Trading is time consuming
If you are a systematic/algorithmic trader like us, there is another important reason to avoid Forex traders. Any profitable backtest is unlikely to go through an incubation period. Our proprietary Forex trading strategies have the highest failure rate during the incubation period of any asset class. Worse, even if they make it through the incubation period, they rarely stay in it long enough to cause a trader to stop trading.
Reason 11: Forex attracts gamblers
If you decide to open a Forex account, ask yourself why: are you a gambler? Most Forex accounts are probably held by impulsive "gamblers". Ask yourself why you decided to open an account: are you a gambler?
Reason 12: Little or nothing is proven
Avoid the Forex market because of unsubstantiated promises. Many traders begin trading in the Forex market because they see strategies that promise huge profits, but often there are no results to back up their claims. If you don't know how this trading system has worked in the past, why would you trade it? Backtesting offers no guarantees, but at least you can see if there has been a statistical advantage in trading in the past.
The Forex market is full of "strategies" based on anecdotal evidence. Almost nothing has been tested, especially those that promise huge profits. Success in trading and investing depends on several factors. One of them is choosing which market you will trade. Forex trading is very complex and you have to be very careful before you stick your foot in the water. If you are going to trade Forex, do yourself a favor and reread our 12 reasons why you should avoid Forex trading.
For your safety, we have compiled a blacklist of brokers.
