Years ago, I was introduced to the Forex markets by a very savvy friend who extolled the benefits of trading or speculating in currencies. My question to him was, how could a private person trade in currencies and why would he or she even want to?
His answer was illuminating to say the least. First of all he explained that in the forex markets, buying or selling made no difference because you would always be trading in a pair of currencies. At the time, he was trading the US Dollar vs the German Deutche Mark. If he thought the Dollar was going to strengthen he would buy the Dollar, which automatically meant he was selling the Deutche Mark. If he wanted to change his mind, he simply sold the dollar, which meant he automatically bought the Deutche Mark. I was fascinated.
“How is it possible to trade in currencies?”, I asked. “Just open an account with a bank that has a foreign exchange trading department”, he answered. I thought about his suggestion for a while and then a flood of questions came to me, which led me to a complete change of attitude toward trading or investing in anything from then on.
I would like to share with you, my revelation about the financial markets, especially the currency markets.
I soon discovered the benefits of trading in the forex markets as compared with the stock and bond markets and even the futures and option markets. The prime benefit is the huge liquidity in forex, which means that it is very easy to get into and out of a position with very little slippage, and in an instant!
In the stock market and the futures markets, it is possible to have a position move after the markets close resulting in a gap down or up the next day when the markets reopen. Traders can get caught on the wrong side of these gaps and accordingly face larger than expected losses.
Another benefit in trading the forex markets is in the fact that one can go long or short with no restrictions. There is no rule against short selling, such as upticks etc. as there are in the stock market.
In addition, because of the large leverage, one can control a large amount of money in a trading position with just a small deposit or margin. Of course this can be a two edged sword. Leveraged positions must be managed if one does not want to face large draw downs when the market moves against them. Forex is one of the best trading environments for a trader who is properly disciplined.
Before you decide that you want to trade, be sure you are comfortable that you have a foundation, which you understand well, and on which you can build your skills. What I soon learned is that to be successful as a trader, one needs to have four mental qualities sown up. These attributes are: patience, discipline, objectivity and a proper expectation of what is possible. Some traders “get” it quickly but many don’t.
I believe that success in trading is directly proportional to the skill set built on the above four attributes.