We're all led into day trading the currency market when we first come across currency trading, or forex, as a means of making money online. The leading promoters of information and services in this field have glitzy web sites full of color, pictures of swimming pools and sports cars, and assurances that you too can join in the fun.
But there's danger lurking in the water, and I'm going to show you what it is and how to avoid it.
The currency market can only be day traded in two ways – spread betting or fixed odds trading. Both systems have the advantage that in most countries any profits are tax free as they are deemed to be the winnings of a bet. This fact is emphasised on all the sales pages for systems, software, services and “robots” relating to forex.
Let's deal with fixed odds betting first. This is where you go to a web site like betonmarkets.com and place a bet, for example, that USD/JPY will be lower than its current level at close of trading on a particular day. Typically this would be the current day, or in one, three or five trading days into the future.
This has the advantage over spread betting in that you can't be stopped out before the bet expires, so if you're right in your prediction it doesn't matter about the volatility in the meantime. And if you want to keep to day trading then you simply select the current day for closing the bet. You'll see presently that this is pure gambling and in the long run the bookmaker always wins.
Spread betting involves a spread of, typically, two to six points, stop loss levels and probably limit orders. This is what nearly all newcomers are directed to do by all the forex systems and robots out there. But day trading the currency market on a spread betting account is a sure way to lose all your money just as much as fixed odds betting. And here's why.
The currency markets are extremely volatile and are dominated by the really big players. We're told that forex is a huge market – over $3 trillion per day being traded by traders from all over the world 24 hours a day – and it's just too big to be manipulated by anyone. That's not true. It's huge all right, but it can be and is manipulated by just a few big players.
Apart from a few private traders who have proven spread betting strategies and who often trade under the mentorship of an expert, private forex traders have generally limited capital and last only a few months before they lose all their money. There's a rapid turnover of new traders as there are always people new to forex arriving, ignorant of the dangers and thinking they've found the new El Dorado.
The rest of the forex market consists of professional traders acting mostly on behalf of big banks. There are in fact only about 20 huge banking corporations that, through their employee traders, dominate the market and can cause rapid and large fluctuations in the prices. Their actions often cause movements in price that defy the charts and indicators everyone else is relying on.
The result is that small, private traders frequently lose money on trades that should have been safe and profitable. Even experienced, professional private traders are frequently caught out. To ride out the volatility you need massive stop loss levels of the size that traders with a limited amount to trade with, and therefore to risk, simply cannot afford.
The currency market is like an ocean in a storm. The huge liners can sail through it and hardly notice there's a storm going on, but the small yachts and dinghies get tossed around and overturned very easily.
There are much easier financial markets to trade. Trading stocks with covered warrants and Exchange Traded Funds may not sound very exciting, but it's much easier to make money with them, even if you usually have to wait a few weeks, rather than a few hours. And if you must stick to trading the currency market then your best bet is to find someone who is an expert financial trader himself and see if you can copy his trades and methods.