When I hear the word investment, I think long term commitment. Forex is not that, it’s better suited to short-term trading. However short-term trading is not for the beginner. Short-term trading is speculative and difficult to master. The chances of success are low. That said, shrewd speculators have made fortunes trading in and betting against currencies. Some of the more famous names include George Soros, Stanley Druckenmiller, Ed Seykota, Paul Tudor Jones.
Forex is not a good investment. Currencies don’t earn a profit or pay a dividend, in addition, currencies are sensitive to a wide range of factors outside the control of an investor. Currency values can be volatile, common drivers of volatility include geopolitical events, economic data release, central bank rate decisions, and government policies.
In this post, you’ll learn why I think investing in forex is a poor investment choice, especially for the beginner.
What’s A Good Investment?
A good investment can mean different things to different people. The type of investment choice depends on the investor’s objectives. I’m guessing for most, a good investment means you cash dividend checks every quarter, like clockwork, the market price of the asset is stable and keeps well ahead of inflation.
This is a passive type investment, it requires no input from the investor. This typically describes stock and bond investments. Forex trading is not that, trading is a full-time occupation. Volatility and leverage are necessary, they can work for the trader and against them. Losing your money trading forex is not only possible, but as a new trader, it’s the most likely outcome.
Can You Make Money Investing In Forex?
Yes, it is possible to make money investing in forex but the chances of success are low. And as you know, it is far more likely a beginner trader will blow up an account and throw in the towel. And there’s no shame in that, not every personality is suited to trading. It takes years of hard work, patience, discipline, stubbornness, experience, drive, passion, and money to become a successful forex trader.
On the face of it, trading seems easy, buy low, sell high. The reality is often quite shocking for new traders. They’ll experience fear, confusion, paralysis, frustration, pain, and shame of a blown account(s). But if trading is for you, you’ll know. Because you’ll persevere, no matter how painful the experience, your passion will drive you.
New traders need to learn quickly, develop a methodology, form a view of the market. Their trading style should suit their beliefs and personality.
Types Of Trader
Time always plays a role when investing/speculating. We can broadly categorize traders by how long they hold a position.
- Longer view (weeks to months)
- Medium term view (days to weeks)
- Short term view (minutes to hours)
That said, many traders use a mix of time horizons when trading. When it comes to describing investment styles, investors/speculators typically fit into one of three camps.
Camp 1 – They use fundamental analysis to drive their investment decisions.
Camp 2 – They use chart analysis to drive investment decisions.
Camp 3 – They use both fundamental and chart analysis.
Fundamental Market Analysis
Fundamental analysis of the forex market means you form a view of world economies and their currencies based on all the information available….it means you read a ton of data.
Forex is sensitive to a wide range of factors, some of the main drivers of volatility include: geopolitical events, interest rate changes, GDP growth rates, inflation rates, unemployment rate, retail sales, construction starts, government policies, elections, and the list goes on.
Entering a forex position means you take the long side of one currency and by definition simultaneously take the short side of another. It means you need to have knowledge of both countries’ fundamentals.
The object of fundamental analysis is to use your knowledge (edge) to seek out an opportunity to pair a strong currency against a weak currency and profit from the movement.
Technical Analysis (Chart reading)
Technical analysis is also known as the technical or chart reading of the forex market is a skill that most can pick up pretty quickly.
The technical analyst is the opposite of the fundamental analyst. The pure tech analyst believes all the data (including all the fundamental data) is expressed in the price of the forex pairing. To the tech, successfully reading the chart gets them to the same place as the fundamental analysts.
Reading basic charts isn’t difficult, however, beginners often become overwhelmed by the array of indicators, this often leads to conflicting signals that cause confusion and paralysis.
Fundamental & Technical Analysis
Many traders regard chart reading as total nonsense, on par with reading your horoscope. Colorful characters from history like WD Gann have raised a few eyebrows and caused many to question if charting is valid.
Gann himself achieved some amazing feats of market timing. He used his own method, often with astonishing accuracy, to predict prices at a given time in the future.
You don’t need Gann’s special charting gifts to make charts work. When combining these strategies, forex traders wait for the technicals to align with the fundamentals before executing their trades.
I make this sound easy, it’s not.
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