Recently I’ve read some absolutely terrible advice on more than a few finance blogs. I’m not going to call anyone out specifically, but it seems a lot of bloggers are advocating Forex (foreign exchange) trading to their readers.
These posts often present Forex trading as a simple, low risk, way to create passive income. Excuse my language, but this is bullshit for so many reasons.
These particular blogs aren’t geared towards advanced or even above average investors. Advising novice investors to start dabbling in the Forex markets is just plain reckless advice.
The Truth About Forex Trading
With stocks and bonds your brokerage firm sends each trade out to an independent exchange to be filled, charging you a set commission regardless if your trade is a winner or loser. Because no single exchange exists for Forex trades, Forex brokers often make money by playing the other side of your trade. Much like the dealer at a blackjack table in Vegas. It’s no wonder they say close to 90% of Forex traders lose money.
2. Forex trading is a zero-sum game. Every trade you make is essentially a bet against another investor on whether a particular currency will rise or fall. For someone to make money in the Forex market, someone else has to be losing money. If you have more information and a better “strategy” then you can make money trading Forex. However with professional traders, banks and other institutions often on the other side of those trades, how often do you think the odds are in your favor? There is a saying in the poker world “It doesn’t matter if you’re the 9th best poker player in the world if you’re sitting in a game with the top 8.” The lesson being, don’t play in any game where you don’t have an edge.
3. There is no right “system” to make money in Forex trading. Do a quick Google search for “Forex Trading” and you’ll get page after page of products and “free” courses that claim to have the secret to making money trading currencies. 99% of them are no more than scammy crap.
4. Forex markets are extremely volatile. Look at what happens to the Dollar every time Ben Bernanke speaks. Currencies are moved by an enormous number of economic and political factors, most of which are wildly unpredictable. This just creates a minefield for small time investors with regular jobs when they try to keep up with all the data.
5. There is a large amount of leverage in the Forex markets. When you open a Forex trading account you must first open a margin account with your broker. Standard trading is done on 100,000 units of currency, brokerage houses will offer anywhere leverage ratios anywhere from 10:1 to 200:1 in order to complete trades. This leverage significantly magnifies your profits and losses on each trade and requires exceptional discipline to manage. Let’s be honest, the average person can’t handle having a few credit cards without getting carried away. I think it’s safe to say most people don’t have what it takes to manage their leverage in the Forex markets either.
I’m not trying to say it’s impossible to make money trading in the foreign exchange markets. But for the small, inexperienced investor Forex trading is like wading into shark infested waters while wearing Lady Gaga’s meat dress. You’d be better served going to Vegas and betting the pass line on the craps table, it will get you to financial freedom just as quickly!
I take issue with the particular blogs I’ve seen post about this recently because they are geared towards average, small time investors. One thing I’ve noticed is that each of these posts contains affiliate links to Forex trading sites. While I have nothing against trying to make some money from your blog posts (I do it too), one thing I will never do is recommend a product or service to my readers that I wouldn’t recommend to my own family. The fact that the affiliate links were prevalent in these posts tells me one of two things. Either these bloggers are writing posts about things they don’t completely understand, or they are knowingly misleading their target readership in order to get affiliate referrals. I’m not sure which would be worse.
To any bloggers that have, or plan on recommending Forex trading to their readers. I challenge you to put your money where your mouth (keyboard?) is. Unless you have experience trading Forex, and more importantly, making money in Forex over a significant time frame. Don’t recommend it to your readers.