Don't you love a good success story?
I have this awesome friend who wanted to get me involved in a group that day-traded forex. The good thing was that I didn’t have to put down any money and I could just learn from them and observe what they were doing – they will all using demo accounts at the time.
They used something called the London Breakout strategy (don’t research or try this please!). This only worked for about a month – then the demo count started making great losses.
Fortunately they didn’t lose any real money. Note that this is not the norm. Many people will try and sell you for forex or trading courses that promise above-average returns.
I’m sure you heard the story of people that go and start forex trading and made a lot of money. It seems like people try to sell us a dream.
The idea of quitting your job, working from home for a couple of hours a day and making more money than we could ever hope for or dream of is an extremely enticing concept.
Sadly, this is not the norm and in general, people who start to lose money, often lose everything.
What is it and how does it work?
The basic idea is that you take two currencies, for example, the South African rand and the US dollar. If you think that the South African rand will weaken, you buy US dollars with your Rands. If the Rand does in fact weaken, you would make a nifty profit!
In this example, if you traded R 150, you would have $ 10. If the Rand weakened by 10 (ZAR) cents, the profit would not be very big. Surely you want to make a lot of money?
This is where leverage come in.
Forex companies allow you to borrow money from them. You can borrow, say, R 1 350 for a trade – You are now trading with R 1 500, and not just R 150!
Once the trade is completed, you have to give them back all the money that you’ve borrowed.
Because you are trading with more money, the smallest change in the exchange rate will cause you to make a lot more money – or lose everything!.
As with all good things in life, people use very big words to make it more challenging for the normal person to understand. Here is some terminology that you would come across when talking to someone who trades Forex:
- Pips – Pips of the smallest amount that you are able to trade. These are like fractional cents.
- Spread – I’m sure that you have noticed when you’re trying to buy US Dollars from the foreign exchange at a bank (we call it Bureau de Change), There is a difference in the buying and selling price this is called the spread.
- Currency pair – When you trade, you normally buy one currency using another currency this is the currency pair with which you will be trading.
- Exchange rate – The exchange rate is the amount that somebody is willing to pay for a specific currency, e.g. R15 for buying one US Dollar.
- Stop-loss order – As you can tell, you can quickly lose a lot of money when trading in Forex. This is why the stop-loss order was invented. You can tell the software to automatically sell a currency if the loss is too big. Think of it as your broker whom you request to sell if the price of the share goes too low.
Though there are many finer details, including going long, short and so forth, I would need to write a book to explain all of these!
How do people decide what to trade?
This is the million-dollar question!
As you might have figured, there is no silver bullet. Though there are a set of different methodologies, it’s not always clear what the reasoning is. The reason is that there are just too many factors.
Generally, there are two ways of deciding what to buy and what to sell: technical analysis and sentiment.
As you might have seen, traders use charts and graphs to show them what the currency has historically done. They draw beautiful lines that connect patterns that they see: These include the highest points, the lowest points, the trends and so forth.
The candlestick chart is the one that is most used. a single candlestick shows for a specific time range the opening and closing amount as well as the trading range. The colour either green or red will show if the currency has gone up or down.
When doing it technical analysis you would also look at support and resistance. Support the lowest price before people start buying whereas resistance is the highest price before people start selling.
Other factors that are important for technical analysis include the volumes of trading i.e. the amount of money that is being traded between the two currencies as well as indicators (special calculations, such as moving averages, trend indicators and moving average convergence-divergence)
Sentiment has to do with what people are feeling about the market and about the currency.
People are extremely emotional about the markets.
Some time ago the US president made very negative comments about Turkey. This caused Turkish Lira to lose a lot of its value. This is absolutely great for tourists who are planning to go to Turkey, yet is quite terrible for the Turkish economy and traders who thought the Lira will be doing well!
Forex is regulated in many countries. In South Africa, for example, you are only allowed to buy different currencies if you have proof that you will be travelling to that country. You also need proof of address and your passport with your visa.
As forex trading has existed for a fair amount of time regulators have been clamping down on reckless trading.
Cryptocurrency, on the other hand, has been around for a very short time. As governments generally take a long time to regulate an industry, it has become convenient to trade cryptocurrencies in the same way that you would trade Forex.
There are many different crypto exchanges where you can trade cryptocurrencies. With the little regulation that is in place, you often have to give proof of your identity in the form of a photo of your passport or ID document.
Note that crypto is a lot more volatile than Forex. It is not unheard of where a crypto coin can lose half its value against the US dollar within a day.
I am aware that everybody wants to make a lot of money and trading seems to be the go-to solution. It is important to note that you should never invest more money than you can afford to lose.
In short, don’t do it.
What do you need to trade?
The most basic requirements that you need is the following:
- You need an account with a company that allows you to trade Forex.
- You would also need software on your computer that allows you to interact with the market (the Forex trading company will supply this, or you can use your own)
- Once you have linked the software and the Forex trading company, you would need a credit card or bank account to send money to the Forex trading company
Who makes the money?
As with all things in life, people want to make money from you.
There are many scams out there that sound awesome on the surface, but are not a true reflection of what is going on behind the scenes.
Here are some of the people that can make money from you:
- Software – though there are excellent FREE software out there (like MT5), many people will white label it and sell it to you for a large amount.
- Forex trading platforms – these are companies make money through either asking a fee to trade and/or adding a markup on the spread (check above definitions)
- Training schools – there are many free training platforms such as baby pips, but many copy and paste info from these websites and sell them as courses for thousands (check here)!
Though I am against the idea of trading, without proper training and a fair amount of valuable experience, I believe there is money to be made.
We can see that through professional traders.
If you don’t have SERIOUS amounts of training and surround yourself with people that are making a fortune, then don’t even think about it.
Also, make sure that the people are actually making the money that they are claiming to have – just because they drive a nice car doesn’t mean they are getting that money through Forex trading.
Don’t be stupid.
Upskill for at least 2 years before you trade.
Don’t get greedy.
Happy investing in everything else except Forex trading.