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5. Why Trade Forex
This is a topic we touched on briefly in an earlier video. As we are asking you to trust us that Forex is the way to go if you are new to trading, we feel the responsibility to share with you the reasons why.
A lot of the reasons to trade Forex relate to ease and accessibility. But, there are also trading reasons, the ability to make profit in any market without having to learn extremely complex systems or mathematical principles, or indeed go and get a masters degree in economics!
Forex trading can be approached a number of ways, and each way utilises different skillsets. Pattern recognition skills will help you succeed in technical trading, while the ability to assimilate and understand a lot of data quickly will be useful to a news trader.
With Forex, it really is horses for courses!
Low Barrier Of Entry
One of the main reasons to get into Forex at the start of your trading career is because, frankly, you don’t need to risk a lot of money to get started.
It is worth saying now, in the early stages of this course, and we will repeat it many times, that you absolutely cannot start trading with money that you can’t afford to lose.
No matter how much money you have, do not put anything into a trading account that should have been spent on rent or mortgages, school fees, car payments or bloody food!
Don’t load up on credit card debt to trade with.
Use only real money from a real bank account.
This is what is known as Risk Capital. It is spare money that, if you lose it, your lifestyle will not suffer. It is money you are willing to risk losing all of in order to have the opportunity to increase it.
Now, having said that, you can get started in Forex trading with as little as a few hundred pounds. Even this few hundred pounds must be risk capital - not next month’s rent!
If you want to buy and sell shares, for instance, you may be paying as much as £15 per trade in fees. If you’ve only got £500 to trade then you are already eating deep into that with every trade.
The fees with trading Forex is often just the spread that we talked about in an ealier video. Sometimes there’s a small commission as well, but both of these fees scale up or down depending on the size of your trade
The fees therefore are always proportionate and never prevent you from trading, no matter how small your trading account balance.
Equally there is a very little by way of a technical barrier to entry. You just need a pc or laptop and access to the internet
We don’t recommend trading exclusively off a mobile phone, although a lot of people do like to!
All of the tools and charts that you will need to get started will be provided for free by any decent broke and there is no need to spend money on complex analysis tools or trading kit when you start!
The barrier to entry is very low, which keeps your financial risk low, which makes it perfect when you are a beginner.
Trading in an established market keeps you as safe as it is possible to be while trading your own money in the inherently unpredictable financial market. As you get more experienced, and become an expert level trader, perhaps being a pioneer may be a good way to grab some serious profits.
But at this stage of your career, sticking to the established Forex markets may be the best idea.
This graph here is a pertinent illustration.
This is a graph of a crypto currency called Ethereum. You will remember that crypto currencies do not form part of the Forex market.
As a tradeable marketplace they were only a few months old when the event that you can see here happened.
This is what is known as a flash crash. The price of ethereum dropped from around $300 to 10 cents!
This 99.something % crash would simply never happen in the Forex space, as these are mature, established markets.
You still do get flash crashes - the Swiss Franc had it’s own in 2015 as you can see on this chart, but it was no where near as bad and they are no where near as regular.
We will cover flash crashes and other ‘black swan’ events in more detail later!
Being in an established market also means that you have decades of research to build on, thousands of established strategies to look at and all the brokers, trading tools and analyis you could shake a stick at!
We touched on liquidity earlier in the series. You will remember that liquidity refers to the ease and speed with which you can buy and sell a product in the market. If you are a seller and it is easy to find a buyer then the market is very liquid, if it is hard to find a buyer it is not liquid. The same applies if you are a buyer looking for a seller.
The Forex market is the most liquid on earth. This is because it is the largest (remember when we told you that over 5 trillion dollars is traded every day!) and has many, many players.
As a retail trader, if you wish to sell USD against the EUR then you are never going to find that no one wants to take the other side of that trade for any significant amount of time.
If you are, for instance, a shares trader who likes to buy shares in small companies and trade them online, then it is very realistic to find yourself in a scenario where you own some shares you wish to sell but cannot find a buyer at a price anywhere near the current alleged price.
There are some, infrequent occassions when Forex markets move so quickly that you won’t get the price you are looking for, or close. This is known as slippage and is part and parcel of trading. It is usually only caused by the microseconds delay between you clicking buy and your order hitting the market, rather than because there aren’t enough buyers or sellers.
With flash crashes like the Swiss franc crash mentioned earlier you can find that no one wants to be on the other side of your trade until a price is hit that is much different from teh currrent price. But this really does happen in seconds - you won’t be stuck in a market for days in Forex!
The last thing you want when trading is to be in a position where the price is going against you and you are losing money but you can’t get out! Can you imagine how disheartening that is? This is why we recommend Forex, where this is less likely to happen than almost any other financial market.
A solid reason, but one which a few people may well disagree with, is that we also like Forex because there are strategies for retail traders like us and like you that actually work.
For a strategy to work for the retail trader they need to be accessible. This means that they need to not be dependent on buying expensive tools or resources, and they need to be simple enough for one person to understand and run them on their own, without a team of analysists or computer scientists.
In Forex a number of such strategies exist.
You can see here the latest test results of an algorithm we have created. As you can see it looks like this strategy will work, but of course only time will tell!
We have interviewed dozens of profitable traders for the Two Blokes Trading podcast and almost everyone trades in a slightly different way.
But, broadly, they can be classed as either:
Technical Traders - using charts and indicators on those charts to trade repeatable patterns
Fundamental Traders - using economic news and data like interest rates or GDP figures to trade
Mixed - People who use a bit of both.
Within each of these areas there are countless strategies that are rubbish! But there a number that work, or at least have been made to work for certain traders.
You can add to this the delightful fact that you can make money trading Forex in all markets.
Imagine that you were a shares investor. During a Bull market (that is a market where shares are going up up up!) it is easy to make money. Just buy some shares!
In a Bear market however (a market where shares are going down) it is very very hard to make money by picking the ones that may still go up!
But, with currencies because it is just as easy to go long or short you can make money regardless of which currency is going up or down!
You can make money in all markets!
Imagine starting as a shares trader just when the stock markets hit a high before bust. How hard would it be to be profitable? That simply won’t be a problem you will encounter in trading Forex.
Before going any further we really wanted to explain why we think Forex is the place to trader. Certainly as a beginner, but we see no need to move even as we are getting experirenced!
As you progress as a trader you will encounter a lot of shiny distractions, people declaring that this or that is the best way to trade. Whatever you choose it is most important that you stick with it and spend the time learning to be good at one thing.
It is our belief that the best thing to start with and to learn to master is Forex trading.
As we have discussed in this video is because it has a very low barrier to entry so almost anyone can get started, it is an established market that others have pioneered for you, it is highly liquid and you are unlikely to get stuck in unwanted trades, there are proven retail trading strategies out there that people like you are using to profit every day, and finally you can make money in any market, bull markets, bear markets - all are the friend of the currencies trader!