The Secret of Currency Trading
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. – Warren Buffett
By James Spurway
A guide to currency trading, or in other words, Making money by investing in or trading forex (short for foreign exchange)
Are you ready for some large numbers?
I mean really large. Blow your mind large. Too big for the calculator to display large!
Here’s a quiz that I can safely predict that most of you reading this would not know the answers to without consulting Dr Google!
Which has the biggest daily volume, all the stocks traded on all the stock markets in the world, or all the currencies traded on the official currency markets in the world?
Who said stocks? Sadly, that’s incorrect. The rest of you who said it’s the currency market, what is the daily turnover of the currency market? How many said around $5 Trillion? Kudos, you know your stuff.
Now, how many times more than the daily turnover of all the stock markets in the world is that? No? Between 15 and 16 times larger!
The total daily volume of all the stock markets in the world that publish numbers, as of the end of 2016 was $77 Trillion, or around $300 Billion a day.
Does that mean that because of the volume of currency being traded there is more liquidity and hence better transaction efficiency and less risk than in the stock markets?
Unfortunately, that depends, however, I’ll discuss that point in the following paragraphs.
I’ve traded stocks through my own brokerage account, can I trade Forex the same way?
“No. “The only similarity might be that you are used to logging into a trading “platform” (software programme that is either downloaded and installed on your computer or accessed via cloud over your tablet or smartphone) and clicking on predefined fields to place orders to buy or sell.
But that’s where the similarity and crossover ends. You’ll need to open a forex brokerage account to trade forex. It might be that the Bank, securities or brokerage house that you have your stock trading account with, also deals in forex and can open an account for you.
Does that mean you should use the same company for both? Not necessarily. Forex brokerage is a specialized business. Everyone seems to offer a trading platform.
And they all seem to advertise that they have the
a) fastest order execution,
b) most competitive spreads (i.e. the difference between the purchase price of one currency and the sale price of the same currency – relative to a second currency),
c) lowest transaction costs,
d) lowest minimum account balance, e) highest leverage and f) smallest contract or “lot” size (i.e. the face value of a SPOT contract where you agree to buy say $100,000 and sell the equivalent in Euros).
Not all forex brokers are created equal. Do your research and make sure you cut through the all the hype and compare several Brokers offerings on a like to like (apples to apples – not apples to oranges) basis.
What FOREX instrument should I trade?
There are many instruments or contractual types traded in the forex market. Spot, outright forwards, foreign exchange swaps, currency swaps, and options make up the bulk of all daily trading volume.
From this list, an individual that is not a trained trader working for a Central Bank, Bank, Non-Bank Financial Institution or Corporation, will start trading in the SPOT Market. That means you’ll be buying and selling currency in pairs.
When you buy USD (US Dollars) you will sell another currency like EUR (Euros) for example.
What strategy should I use?
As far as Trading Strategies are concerned, trading forex is so much more complex than trading stocks.
It’s possible to trade in and out of currency pairs quickly when using a trading platform or App, and in so doing, simply buy and sell on a hunch or a visual cue you believe you detect in the price signals.
This is referred to as “Day Trading”. This might be okay for someone who is only putting a couple of hundred dollars at risk when they open their forex brokerage account and start trading. Logically though, apart from giving you an adrenalin rush, it is a poor use of your time.
It might take a couple of hours or more a day every day to create say a return of 10% or even 20% a month. That is using extremely high leverage and placing all of the initial capital at risk.
If you start with $200.00 in your account, even a monthly return of 20% only means a Dollar Return of $40.00 – for maybe 40 hours of work. Is working for $1/hour really a good use of your time!?
What am I saying. Unless you have $10,000.00 or more at your disposal and are willing to be aggressive and risk it all, the dollar returns (you don’t bank percentages you bank dollars!!) just don’t justify the time that you should invest to trade with a degree of professionalism.
However, if you intend to do this remotely professionally, or put another way, if you are going to place more than a few thousand dollars at risk when you open your forex brokerage account and start trading, you really should invest in proper training through a vendor that has live coaching from traders who can show you their trading account and hence prove that they can walk the walk, not just talk the talk.
One final note, it is this author’s personal opinion as someone who has traded his own account and been a fund manager and traded client’s funds, that one strategy that should not be followed by anyone starting out in the forex trading business and that is Binary Options.
This is not a strategy that any novice investor/trader should pursue.
Is there an alternative to trading my own account?
There is an extremely attractive option to trading your own forex account if you want to have some exposure to currency as an asset class as part of your overall investment portfolio. And that would be to conduct a search for licensed Asset Managers or Investment Advisors that specialize in and have a track record in creating and implementing forex trading strategies.
It’s not the job of this post to deliver an essay on portfolio investing, however, the goal of every investment that an individual makes should be to add to the risk-adjusted return, meaning to increase the ROI on the portfolio by more than the associated increase in portfolio risk (risk of loss).
Currency is an asset class, just as much as stocks, bonds, and real estate, and deserves to be included in a modern day investment portfolio. The only question then is whether to trade your own account of letting a professional trading manager do it for you.
The pros of doing it yourself are that you enter the market and experience the thrill of being a currency trader for as little as a couple of hundred dollars.
The cons far outweigh the pros on this one and include the fact that you have to have a substantial minimum starting capital before the dollar returns you could safely expect to make, would have any noticeable impact on the dollar amount added to your investment portfolio. Also, without proper training and being disciplined enough to follow a strategy all day, every day, the risk of loss of part or all of your starting capital increases over time.
Please note everyone is responsible for their own action, you can win but you can also lose. Go slowly and only risk the money you can afford. Currency Trading is at your own risk.
I love to hear your thoughts and experience please feel free to comment below
Your truly. Jim