Things you don’t know about Forex trading
So, online forex trading. And other strategies that promise to make you money after a few sessions of instruction, or reading a few books, or a few months of experience. I will try and be as neutral as possible. If you agree with me, gravy. If you don’t, sawa.
In everything involving gain and loss of money, there is one key word. It is so important that you should park it in your front pocket for the purposes of this conversation, and perhaps for the duration of your life in this world. This word is:
It governs everything.
So what are the risks in this business? There are several, and many are quite severe, but I will outline just a few. These, in my opinion, are the ones that matter, and the ones that should concern you.
First, what is forex? Most countries in the world have their own currencies, except for a few which share one (such as the Europeans in the eurozone) and in West Africa (which share the CFA Franc), and some which use those of other countries (such as Zimbabwe until recently). The different currencies have different values against each other, and since 1971 (to be very simplistic about it – the reasons are the subject of another history lesson), these currencies have freely ‘floated’ against each other, meaning that their values move against each other freely. What gives a currency value? Ultimately, it is a reflection of the country (or the currency zone)’s underlying economy. But, day to day, and month to month, these values will fluctuate. This then is an opportunity to trade.
The foreign exchange (or forex) market is an active one. Different players are in the forex market for different reasons. Central banks, companies which need or generate foreign currency, commercial, investment and merchant banks, and beasts known as hedge funds will buy and sell (trade) currencies, for their respective reasons. Increasingly, though, some players trade foreign exchange as if it was just another commodity. This is same way there are commodity traders who never consume the commodities they trade (the best illustration of all time is Eddie Murphy’s 1983 movie, Trading Places). These players exploit every tiny movement of one currency against the other, buying and selling and making (or losing) money in each of these little interstices. Most are remarkably deep-pocketed, trading billions (of dollars) in a day, and moving with remarkable speed. As with most things nowadays, the internet has turbocharged this, and certain technological and regulatory rule changes have made it possible for people to enter this business, often with little more than a computer (or even mobile phone) and an active internet connection. Now, an important caveat. Forex trading is like a see-saw. When the person on one side of a trade is up, the other is down. Win-lose. Profit-loss. It’s what’s called a zero-sum game. The broad idea is to make sure your wins are greater than your losses, long-term.
That is the background. Now take that word – RISK – out of your front pocket. Let’s discuss it. First, as outlined, the principal players are massive entities. Gigantic multinationals. Investment banks that you hear of only on CNBC and Bloomberg. These institutions not only have billions of dollars to play with, but they hire the best and brightest. PhDs in maths, physics and computer science. They buy the most powerful computers in the world. They deploy algorithms and, increasingly, artificial intelligence (AI). All to ensure that they can exploit the most minuscule advantage. Not just that, but they also have access to the best, latest and fastest information. An example: a Bloomberg terminal costs 2.5 MILLION shillings a year, and you have to have the smarts to decipher the flood of information it spits out, in a way that is profitable. They trade round the clock, with offices and traders and trading rooms strategically placed round the world, such that by the time you wake up (even if you wake up at 3 a.m.) they have been absorbing information, incorporating it into their thinking and trading for hours. You stop for a meal? They’re trading. Jump into your car or mathree? They’re trading. Stop to look at Whatsapp or Twitter? They’re trading. Go to the supermarket or to church? They are trading. Constantly and endlessly exploiting every little gap to make money. Remember that see-saw? That is you sitting on one side, against the entire All Blacks rugby team on the other side.
That is your first risk. There is little chance (actually none) that you can deploy the firepower these guys have, and it is not a fair fight.
Of course you can, on the off chance, trade and win. You can even do it enough times to convince yourself that you now have it mastered. You can jog enthusiastically around the neighbourhood. Meet and even beat Usain Bolt, on the day his hamstring is tight and he’s wearing the wrong shoes.
Two, there’s an entire industry built around convincing amateurs that they can trade and win. Books. Convincing-looking online courses. But don’t forget that the true industry here is not trading – it is the books and courses! $100 here and $50 there. Who’s paying? You.
Three, a curious animal named leverage. In simple terms, put a bit of money down, but trade a multiple of the amount. Sounds like a deal, especially when you’re winning. But when you’re losing, there goes the proverbial shirt. You’re in with only $500, trading $5,000. When there is a margin call (look it up) there goes your money, your dreams and your future, up in electronic smoke. Can you win? Again, of course. Can you win consistently? Much lower chance. Can you win long term and become a millionaire? I think not.
So, because Twitter threads have limits (which is where this thing started), what is your take-away? Online trading is not for the faint of heart, or for amateurs. You can beat Usain Bolt, but not when he is on his best day. You will not beat him running at top speed and he is…driving away in a Porsche.
If you think you are really good, really talented and can make lots of money, here is some advice: apply for a job in these investment banks and hedge funds. Or just the treasury department of a mid-sized company. And then you’ll not be trading (and losing) your own money. The bonuses are really good, and you are then free to come back here and tell me about how online forex trading is the great new thing.
One last thing. Talk to the Capital Markets Authority. You’ll ultimately need them to protect you were things to go belly-up.