Recent turbulence in the global foreign exchange markets may be troubling for central bankers but for investors keen to diversify away from traditional asset classes, volatility means greater opportunity. In a decade during which the S&P 500 has barely altered, Forex trading has moved from the shadows to become a mainstream trading activity.
A decade ago the forex markets were very much the exclusive preserve of investment banks, hedge funds and other sophisticated investors. Indeed, the world’s currency markets had a fearsome reputation that put off all but the most determined private investor from getting involved. However, over the last ten years a combination of dismal stock market returns and improvements in online trading resources have led to a jump in the number of amateur Forex traders.
The drop in equity markets after the dot com bubble burst in 2001, led to an increase appetite from retail investors into the possibilities offered by non-traditional asset classes such as commodities. In particular, the events of 9/11 and subsequent military activity in Iraq elevated the profile of hydrocarbon markets and lifted the esoteric world of commodities out of the shadows. Investors came to realize that unlike stock markets, they could make money whether the underlying asset was rising or falling and that volatility aided rather than detracted from this goal. The higher profile awarded to commodities was further solidified when it became clear that the integration of countries such as Brazil, Russia, India and China into the global economy would significantly altered the supply and demand profiles of commodities including industrial metals, foodstuffs and energy products. As a result of this increased profile, it wasn’t long before investment houses were offering a range of products whose ultimate performance was closely linked to movements in the commodity markets.
Following on the heels of the new interest in commodity trading has been a significant increase in foreign exchange trading. Investors noted the similarities between the two markets, not least ability to make profits regardless of market direction, and a number of online products and services were created to help educate and provide traders with the resources necessary to engage in Forex trading. Fast forward to the present day and amazingly a Google search for the term “learn forex trading” results in over 10 million pages compared to just 3.7 million for the expression “learn stock trading”.
There is now big demand from retail investors, part-time traders and even college students for information and products that help them profit from the volatile world of currency trading. Most however are likely to fail. It is generally accepted that a maximum of 20% of traders involved in markets such as Forex, commodities and futures are likely to make any money, many will simply lack the discipline required to become profitable in this demanding environment and return to the less challenging equity markets.
Interestingly, professional forex traders suggest that the most common reason for newcomers to fail is not due to a lack of information or trading resources but that in common with elite sportsmen and women, successful trading is largely a matter of managing emotions, understanding probabilities and effective risk control. For example, it is very common for successful traders to only make a profit on half of their trades, however when these results are combined with a strict methodology for managing risk (often referred to as “running profits and cutting losses”) the returns are impressive.
Newcomers can start trading with as little as $200. But those with little or no experience are strongly encouraged to practice their trading in a demo account before committing real funds to the market. Whilst no one should suggest that Forex trading will ever surpass more traditional investing strategies, for those with the patience and discipline to learn from the professionals it is well worth adding this activity to your trading arsenal.
For additional information on the challenges facing newcomers and an effective forex for beginners blueprint created by a renowed trading veteran visit www.beginnersforex.org
