Foreign exchange (forex) trading looks like one of the more exhilarating, hands-on investment options from afar. It takes less than ten minutes to get plugged into the Matrix: open a live trading account and be placed right in the middle of the trading room floor. You can run with the big cats whether you have been trading for decades or are a complete newcomer to the system. There, you can watch the numbers fluctuate in real-time and place your orders with the click of a button.
The internet is filled with offers to “increase your growth now” and “learn trade secrets for five hundred dollars an hour”. That makes jumping in and making money seem almost effortless. But is it as easy as they say?
Learning the Trade
Simon Brown, founder of financial education website JustOneLap, says that people believe they can make fortunes and ask themselves “how hard can it be?”
“It can be very profitable, but one needs to learn first and trade with very reduced gearing levels,” he says.
Financial education is vital, and those with little knowledge are likely to get hurt. “Running with the bigger dogs is dangerous as they are not only bigger but more experienced. Stay away if you are completely new to trading and markets,” says Brown. He adds that that there are many places online for those who want to learn.
Scams riding on the back of forex trading are rife, promising amazing returns on your money within a short period. But first you have to sign your money over and purchase the accompanying package and self-hypnosis tapes.
Before trusting anyone with your money, keep in mind these institutions have to be authorised financial services providers and regulated by the Financial Services Board.
Brown advises: “If they promise quick riches, it’s a scam. Rather find a recommended offer”.
Speaking with Saxo
Saxo Capital Markets carries a fair amount of weight in the financial world. Started in 1992 as an online trading platform, it now spans 26 countries with its head offices in Copenhagen. They offer a comprehensive, easy-to-understand trading platform, which Saxo’s Dylan Bester says it is “continuously upgrading and enhancing”.
According to Bester, with the right tools and management trading forex can be very successful. But don’t expect to make money right away. “The ‘make money with Forex’ adverts have created a sensation. But if you believe forex is a means to financial freedom within the first or second month, you will be wasting your time – that is not sustainable.”
What determines the value of a currency? Bester says it depends on a large amount of data, but that interest rates, trade balances, growth and market sentiment all factor into the bigger picture.
“Forex should be considered an alternate investable asset class which should be part of every portfolio looking to outperform on an annual basis,” says Bester. “All this requires is correct management of the portfolio and exposure to the market at one time.”
Within his own trading, he says that he makes sure to manage his trades effectively. “Stops and take profit levels are an essential part of the trader’s toolbox.”
He says that risk is one of the most important factors that need to be taken into account when managing your portfolio. “Ask yourself what sort of risk you will assume to achieve a certain result. Always calculate your risk-to-reward ratio. Standard profitable ratios are 1:2. The greater the better. The other two legs of trading are fundamental and technical analysis.”
Then there is the question of psychology. “There are very different types of traders. This is discovered on a very personal level,” he says. The most important trait? “Disciplined traders follow their own rules, keep learning from their trading experiences and constantly look to achieve their full potential.”
Demo accounts: The minefield defused
Before putting real money at risk, you can create a demo account. These allow the user to trade virtual currency without any financial risk. The numbers are real, the software is real, but the money being traded is not. This allows the user to try out the software and play around with the market (usually for a limited time) before signing up for a live account – where the risks are real.
Would online Texas Hold ‘Em turn you into a better poker player? Can a demo account teach you real-life trading? Overall, demo accounts are recommended, whether to familiarise yourself with the market or the software. However, while a virtual account comes close enough to simulating a real account, emotions like fear and greed only become factors when one is trading with real money.
A trader’s experience
Hanley is a full-time systems analyst and a part-time forex day-trader. While he only trades part-time as a pastime and additional source of income, he says he knows a few people who successfully make a living from forex trading.
“If you’re the type of person who can’t deal with losing money, then stay away. The markets are too volatile and you’ll lose sleep like you can’t imagine.”
This he has learnt from experience, having had his accounts cleared out in the past. Losing money comes with the territory, and it’s up to the trader to rely on their knowledge and insticts to keep their losses to a minimum and know when to make a move. “On the other hand, if you’re the cautious type and not so greedy, forex can be rewarding.”
Hanley advises new users to research brokers before finally settling down with one, and to always choose a regulated, registered broker. He also mentions the importance of choosing a broker with ECN/STP (Electronic Communications Network/Straight Through Processing), which means that your trade is submitted directly to the market. “This is vital. You do not want to deal with a broker who has access to your trading information.”
He makes use of a few brokers himself, but mentions Pepperstone as his favourite due to the fact that they are based in Australia and regulated by the ASIC (Australian Securities and Investments Commission). He says that MetaTrader 4 is the industry standard offered by most brokers. “It’s simple to use. Choose a chart with a currency pair you want to trade, place a market or pending order and that’s it.”
For those learning, he recommends Babypips.com and Investing.com. “You can be an absolute beginner and everything is explained on there. The best way to learn is to get your hands dirty.”
- Research your broker.
- Choose a broker that is registered, accredited and recommended. Brokers have nuances in the platforms they support and it’s a good idea to get used to a broker first before opening a live account.
- If you’ve made three or more consecutive bad trades in one day, don’t trade again for that day. There will be days where you will feel the world is against you. Dust yourself off and try again.
- Use money-management. Tell yourself how much you are willing to lose (eg 10% of your account value) and then put a stop loss at this value – do not move that stop!
- Be psychologically prepared to lose money. Because forex uses leveraged trading, you can lose more than you initially deposited.
- Don’t be greedy and don’t continue trading once you’ve reached your target.
- Use the appropriate lot size (for example, don’t trade a standard lot if you only have USD200 in your account – that is asking for trouble!).