the few hours before the markets in Asia opened, when I saw an
advertisement for Forex. The spot featured a “testimonial” from
an “actual Forex trader.” The trader was a cattle farmer in
Montana or some other western state. He was standing in his pasture,
talking about his experience in international investing and
how Forex was the market of the future.
During the boom markets of the late ’90s, I grew used to seeing
commercials or stories about traders in remote or strange places,
but this spot bothered me. It wasn’t that the investor had begun
trading or that he had become successful. What angered me was his
advertised trading “strategy.” He claimed that the Forex market
was easy. He could wake up, place his trade, and come back later
in the day to collect his gains. In between, he had time to do his
chores around the farm.
If there is one thing this market is not, it’s easy. Every Forex
trader must share a worldwide market with central banks, international
financial institutions, portfolio managers, and other traders.
Moreover, the market’s volatility makes trading a time-consuming
and often exhausting experience. I have sat for 48 hours straight,
watching a position dance 15 pips above my emergency sell price.
Forex is a hard market to trade—physically as well as mentally.
A trader cannot simply enter a trade and then go about his or her
day. I cannot stress this enough. The market does not have defined
trade periods, so moves can occur anytime within a 24-hour
period. This constant stress can break down a trader in a short
period of time, whether he or she is winning or losing.
With this in mind, every investor, no matter where he wants to
put his money, must first ask himself some hard questions. Do I
understand the investment fully? Am I aware of the degree of risk?
How does it fit in with my portfolio and my investment objectives?
Am I prepared to invest the necessary time and energy required to
make sound decisions about my investments?
Each question is important and requires an honest answer. If
you can’t answer these questions, you’ll have better luck going to
Las Vegas and playing the slot machines or investing in a lessstressful
asset class, such as fixed income.
If you can’t answer these questions honestly, you also will lose
money. Take a cold, hard look at yourself. There is no shame in not
being able to watch your investments lose value—it’s a natural
instinct. But successful investors know that losing money is inevitable
and that keeping investing discipline is essential to achieving success.
The key is to understand your tendencies. Does the idea of losing
money keep you up at night? Can you absorb financial news
without becoming emotional? Do you make investment decisions
quickly based on the latest trend or tip? Again, there is nothing
wrong with answering yes to these questions, but you may be more
comfortable with investments that are more conservative than
those on the foreign exchange market.
However, even if you stay calm and focused with your investments,
making money in Forex also requires active study and consistent
attention to markets around the world. This means educating
yourself about the Forex markets (reading this article is a good start)
and checking various news outlets to keep up with changes.
Once you have thought about these questions, you should consider
whether Forex trading suits your investment goals. As I’ve
said before, Forex is an incredibly dynamic market with enormous
opportunities, but it can also lead to quick losses over the short
term. It should be considered a high-risk investment only suitable
for those investors who can also absorb the losses that can build up
as the market jumps or plunges. It is not a place to stash a retirement
account or a nest egg for a home.
Personally, I recommend that a beginning investor put no more
than 2 percent of his or her total assets in Forex. If you are more
experienced and have had some track record of success, I would be
comfortable increasing that number to 5 percent. I developed this
number by looking at the benefit of having a noncorrelated commodity
in every portfolio.
Once you have a good idea of your strengths and weaknesses as
an investor, be aware of some dangers all investors face, no matter
their style or tolerance for risk. Everyone must avoid the following
common mistakes:
- You don’t have a plan—If you can’t explain why you are making a trade and what you will do if it either succeeds or doesn’t, you don’t have a plan. Trading “on the fly” or by instinct leads to losses. Hope is not a plan. The second half of this tip is to be disciplined with your plan. Once you’ve picked a strategy, stick with it. Don’t improvise, or you won’t learn from your mistakes.
- You trade against the market—Many investors think they know something the markets don’t. When an investment slides, they hang in there. When it falls further, they simply buy more, convinced that the market will rebound and they will reclaim their losses. This can happen, but not often enough to form the basis of a strategy. Catching a reversal is a very difficult strategy. Don’t become so attached to your position that you lose sense of objective market forces. When a position turns sour, cut your losses. The other half of this tip is don’t sell a profitable position until it hits your target. If you have thought through your plan, you will end up with far more profits than losses.
Read More: What It Takes to Be a Forex Investor?
