Chapter 3. Why Forex is or isn’t For You

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So, you might like the idea of being a Forex trader, but it is not right for everyone.

Back in 2016 the UK’s Financial Services regulator, the FCA, conducted a review of retail trading – not just Forex, but all types including CFD trading and binary options – and found 82% of retail traders lost money.  Trading is a zero-sum game so there are going to be winners and losers but this ratio led us to two conclusions:

  • This underscores the importance of working out if Forex is right for you…before you consider risking your money on it.
  • It means the 18% balance must either breakeven or be profitable – about 1 in 5.

We’ve pulled together the reasons traders should and shouldn’t be trading Forex for. All aspiring Forex traders should be asking themselves their reasons for getting into Forex trading before they get started.

If you can honestly say its for the right reasons, and not the wrong reasons you’ll have a much greater chance of making a success of it, of being in the 1 in 5 group of traders, over the long term.

5 reasons why you shouldn’t trade Forex

#1 You trade with money you can’t afford to lose
Because the market can be volatile, there is always the risk of losing money when trading a currency pair.

In addition to the inherent risk linked to trading, with Forex trading you need to add margin trading and leverage, which means that you can trade large amounts with little initial capital.

So, this high level of risk means that you need to be sure that you do not use money that you need to live on – it sounds an odd thing to say, but make sure you always trade with money you can afford to lose!

#2 You don’t know what you’re doing
Before even considering trading, you need to know the basics of the markets, what influences them, and how trading works.

… you need to have a trading strategy that suits your trading style
Another important aspect is you need to have a trading strategy that suits your trading style, with strict money management and risk management rules that govern how you allocate your funds to trades.

If you have no trading experience, and you do not know how markets work and relate to each other, Forex trading might not be right for you – at least not yet.

Must-reads:

#3 You can’t handle when you’re wrong, or when you’re losing
When making trading decisions, you can be right and make money, but you can be wrong and lose money.

That’s fine – as long as your profits are higher than your losses. Losing trades are part of the trading game – you need to be prepared for this and not take it personally!

In Forex trading, you need to quickly recognise when you’re wrong, and close losing trades as early as possible. It’s important to develop your ability to accept your losses and learn from your trading experience.

But do remember, it’s ok to be wrong – you can’t be right 100% of the time in every single trade you execute. And if you can’t handle losing, you won’t be able to be profitable in the long run.

Read: The Dangers of Forex Trading Revealed

#4 You’re risk-averse
Fast-changing market conditions, high volatility, and leverage can make Forex trading a high-risk activity.

You can make huge returns in the FX market, but these kinds of returns do not come without risks, especially when using leverage.

So, if you’re generally a risk-averse person, Forex trading is not going to fit your personality.

#5 You don’t have time

There are several trading styles you can use when trading currencies, each requiring a certain amount of time in front of the screens.

For example, you can use a trend following method, or position trading strategy, which will require less time than short term trades, like scalping or day trading.

Keep in mind that learning about trading, the Forex market and how to develop the right trading plan takes time. You’d better be sure you have time to dedicate to this activity before starting to trade in currency pairs.

Must-reads:

5 reasons you should trade Forex

#1 You like the idea of trading at any time you want
The Forex market is open round the clock, which allows you to trade whenever you want.

It provides great flexibility for traders who want to trade part-time and as there are no market opening or market closing times the opportunity for potential profits is 24 hours per day, 5 days per week!

Of course, trading volume varies depending on how many sessions overlap, and it often decreases when there are bank holidays in major sessions such as on Wall Street.

Read: How Does the Forex Market Really Work?

#2 You like technical or fundamental analysis
Forex trading is often geared towards technical analysis, so if you have sound knowledge of price study, charting and technical patterns, Forex trading might be a good fit for you.

Forex trading is often geared towards technical analysis
While using technical analysis, you may find it useful to use economic calendars, such as the U.S. Market Economic Calendar, or the Global Economic Calendar.

The impact of news is also strong on the Forex market, as currencies quickly react to macroeconomic news, political events and economic data.

So, as a Forex trader, you should monitor the economic calendar for fundamentals to determine when currency pair prices might accelerate and break important levels thanks to higher volatility.

#3 You can deal with a high-risk environment
As the Forex market can be a volatile market, you’ll need to be able to tolerate a certain level of risk. To better protect your trading capital, it’s important to have a sound risk and money management system with rules to follow.

… determine your stop-loss and take-profit levels before entering the market
For instance, you should always determine your stop-loss and take-profit levels before entering the market. In this way, you’ll already know how much you’re willing to lose and how much you can expect to earn from your position. This is called your “risk/reward” ratio.

Another example would be to adapt the size of your positions depending on the current trading conditions and the evolution of your trading capital. All these rules should be part of your trading plan and to be profitable, you should always stick to your plan!

Read: What are Trailing Stops?

#4 You are dedicated and patient enough to develop a trading plan and follow your method
Commitment, patience, and dedication are the most important ingredients in trading.

Having a trading plan to follow when trading is vital if you want to be successful, but most importantly you need to be committed to follow it, and patience to open/close your positions according to your set-ups.

You need to develop your strategy first, or trading system, before trading real money on the Forex markets – if not, how do you know what you’re doing, and that what you’re doing is making money?

A trading plan is a description of your trading method:

  • Trading style: scalping, day trading, swing trading, position trading
  • Currency pairs: majors, minors, exotics
  • Timeframes 5 min chart, 15 min chart,  4h chart
  • Size of your positions
  • Set-ups to follow to enter/exit the market
  • Risk and money management rules: risk/reward ratio, stop-loss and take-profit orders

Read: Who are the Best Forex Traders in the World?

#5 You want to take advantage of a growing market with high liquidity, volatility and leverage
The Forex market has been a fast-growing market over the last 20 years.

According to the 2016 Triennial Central Bank Survey of FX and over-the-counter (OTC) Derivatives Markets from the BIS, trading in foreign exchange markets averaged $5.1 trillion per day in April 2016.

This high trading volume increases the liquidity of the market, which means that it’s easy and fast for a trader to enter a trade and also reduces the risk of potential price manipulation from others.

Read: What is Illiquidity in the Financial Markets?

Forex trading also uses leverage that can magnify your returns (as well as your losses) in a very short period of time. This leverage allows you to manage more money than you currently have in your trading account for potentially higher profits.

Rule of thumb

Deciding whether to trade or not to trade the Forex markets is up to you, but remember that even if you’re one of the smallest actors on the Forex market, you can still profit from it. Take your time going through your reasons for wanting to trade and you’re doing it for the right reasons – if you are it is more likely you’ll make a success of it.

If you want to take advantage of Forex trading, it’s a good idea to use a demo account before risking real money in your trading account.

There is very little chance that you can be successful without trying out your broker’s trading platform first. This includes real-time charts and trading tools, its trading conditions to test your own trading system.

Start learning

Learn the skills needed to trade the markets on our Trading for Beginners course.

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