One of the biggest misconceptions about trading forex is that it represents easy money. After all, what could be easier than making money from your computer while sitting at home in your pajamas?
But being a currency trader is more complex than it seems, and there are many things you need to consider before you decide to quit your day job and go into forex trading full-time.
• The markets can experience high volatility due to factors beyond anyone’s control. It is well-known that the value of a currency can be affected by political and economic developments in the country that issued it. This means that you can suddenly lose a lot of money on your holdings. For example, when Iceland when bankrupt in 2008, a lot of traders lost money on the krona as trading in the currency was suspended since it had effectively lost its value.
• Using high amounts of leverage exposes you to high levels of risk as well. Unless you have a lot of money in your trading account, you likely use a lot of leverage to make money on your trades. After all, with leverage of 50-to-1, you can open a position worth $50 for every $1 in your account. This means that your profits are greatly magnified with minimum capital. However, if your trade is unsuccessful, any losses can become catastrophic.
• Determining the prices of currencies can be challenging. As we already mentioned earlier, the prices of currencies can be affected by factors such as economic and political developments, which make analysis difficult because their effect is so unpredictable. This is why most forex traders choose to make their trading decisions using technical analysis. But it is also very easy to make mistakes when analyzing the markets using technicals, exposing the trader to losses.
• You will have to teach yourself. Unlike stock trading, forex traders cannot call on professionals for assistance or mentorship. You will have to teach yourself everything you need and the process of learning can be costly. It is during this initial period that many beginners quit as they suffer financial losses that they cannot shoulder. And the learning process never stops. You need to continue studying and learning in order to become an effective and profitable trader.