Forex, or Foreign Exchange, is an international marketplace where currencies are exchanged against each other. Some say it’s the largest and most liquid market in the world. That makes it easy to get into, but not always so easy to get out of.
While you’d probably be better served by Wikipedia for a general overview, I’ll put my own spin on it here as a self-employed home/remote worker living in England. There might be enough interest there to make this post worthwhile, otherwise I’m mainly writing to consolidate what I’ve learned since Jan 2017.
From a UK resident standpoint, Forex is an attractive investment vehicle given that:
a) tax-free investment is still possible (as of Jun 2017) via ‘spreadbetting’
b) the London session straddles the US/Asia sessions, giving good daytime opportunities
c) it is relatively cheap to trade, with only the spread and overnight costs to consider
You are essentially trading a package of one currency against another, buying at ‘the ask’ and selling at ‘the bid’, with a commission paid per trade known as the spread, or the difference between the bid and the ask.
This differs to stocks and shares in that you don’t have as much commission to pay per trade, so in theory your account balance should last longer. The downside is that there is less volatility in Forex than in stocks and shares, with only a few percentage points difference on average, compared to multiples of that possible in stocks.
This is somewhat offset by the offer of leverage and lot sizes.
Leverage is a blessing and a curse in Forex. You can quite easily, by overleveraging your trades, wipe out your account in a handful of trades. The trick shared publicly by all experienced traders and respected publications is to manage your risk by adjusting lot or unit size (by trading by microlot or unit - ask your broker) and stop loss so that only some ~2% of your account is at risk per trade. This way, in theory, you can take ~50 trades that all lose before your account is empty. Leverage magnifies your losses (and wins) so that trades end up representing a much higher percentage of your total account size. This leads to your trading being stopped in what is still known as a ‘margin call’, from when brokers would ring clients to tell them they had exhausted their margin (what is offered as leverage against your capital) and would have to add funds to their account to continue.
This is another reason why large capital accounts make life easier in Forex, offering lots more margin through leverage, but only using a small amount when risk is managed.
I think I’ve got that about right, but please do continue to read around the subject or let me know if something’s missing.
In a sense it is, in that you speculate at a point in time whether the market will go up or down. It sounds on paper like a flip of a coin. Except a casino or betting game typically has a controlling ‘house’ that has set the odds in its favour by design. Forex doesn’t have that. Some say it’s like gambling, but at a casino where the house doesn’t have a fixed edge, only traders give them their edge. Brokers and other market participants are effectively the house you play against. Those other market participants can be armies of highly-trained institutional traders. A daunting adversary. But you can still have an edge over them. They are forced to keep their capital in the market, whereas you are not. They therefore take more risk. You can move small, undetectable amounts into and out of the market. They rarely can, affecting prices as they operate. Their targets are conservative, trying to offset the risk of being in the markets in all seasons. Retail traders, you and I, can take calculated risks for bigger relative payoffs.
Our aim then, as retail traders, is to find our edge over the market, not blindly 50⁄50 every trade, cutting losses and letting winners run. Although that latter part is an essential part of any strategy, we also try to stack the odds in our favour on every trade, recognising patterns and trends over the long term and joining them. We have volume data to copy the institutional movements, we have market/volume/price data to see which prices act as points of control and a host of other indicators that give us information that not all market participants have or use.
Experienced traders like to distance their activities from gambling, and it’s clear to see why: the premise of a sustainable trading career is to find and exploit an edge against the rest of the market.
They say 90% of traders lose 90% of their money within 90 days. The 90/90/90 rule. Obviously not scientific or reliable as a stat, but a guiding warning that if you do go into the market gambling, you risk losing your hard earned deposit very quickly.
The sustainable approach is therefore to test your strategy on demo and backtesting accounts, simulating years of trading in a few weeks or months. There are no hard and fast rules, but generally if your strategy works over 1000 trades you can start to think about putting real money into it. There is software available to help backtest, or you can use a demo account and just manually scroll the chart, testing your strategy as you go.
Estimates vary wildly, with some claiming 10% per month is easily doable (that would be winning ~5 x ~2% of account trades at ~1:1 risk-reward) as a conservative estimate, while others say much higher, trading more aggressively or being smarter with trend following and risk management. Adding to winning trades, cutting losses early etc. and controlling emotions and the psychological aspects will all give you an edge, adding up to potential returns in the tens of % per month, compounding over the years if you don’t withdraw from your account.
This will give you the best, most up to date links to resources for beginners and experienced traders alike.