FOREX Investment Myths
Investment Protection
The foreign exchange market is
one of the most popular markets for speculation, due to its
enormous size, liquidity and tendency for currencies to move in
strong trends. Presumably, these characteristics would enable
traders to have tremendous success. However, success has been
limited mainly for the reasons described below.
Many traders come with false expectations of the profit potential
and lack the discipline required for trading. Short-term trading
is not an amateur's game and is usually not the path for quick
riches. Though currencies may seem exotic or less familiar than
traditional markets (i.e. equities, futures, etc.), the rules of
finance and simple logic are not suspended. One cannot hope to
make extraordinary gains without taking extraordinary risks. A
trading strategy that involves taking a high degree of risk means
suffering inconsistent trading performance and often suffering
large losses. Trading currencies is not easy (if it was, everyone
would already be a millionaire), and many traders with years of
experience still incur periodic losses. One must realize that
trading takes time to master and there are absolutely no short
cuts to this process.
The most enticing aspect of trading currencies is the high degree
of leverage used. Leverage seems very attractive to those who are
expecting to turn small amounts of money into large amounts in a
short period of time. However, leverage is a double-edged sword.
Just because one lot ($100,000) of currency only requires $1,000
as a minimum margin deposit, it does not mean that a trader with
$10,000 in his account should easily be able to trade 10 lots or
even 5 lots. One lot is $100,000 and should be treated as a
$100,000 investment and not the $1,000 put up as margin. Most
traders analyze the charts correctly and place sensible trades,
yet they tend to over leverage themselves (take a position that is
too big for their portfolio), and as a consequence, often end up
forced to exit a position at the wrong time.
If an account value is $10,000 and the trader places a trade for 1
lot, he is in effect, leveraging himself 10 to 1, which is a very
significant level of leverage. Most professional money managers
are not allowed to leverage even this high. Trading in small
increments on the account will allow the trader to endure many
losing trades without experiencing large monetary losses.
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