What is Forex Trading?

Every time the $A goes through parity (equals 1 USD), in one direction or the other, every Tom Dick and Harry is suddenly a currency expert. The same thing happened when it first rose through parity in October 2010. It hasn’t happened for a while now, but whenever the Aussie dollar hits that big figure it’s as if it miraculously releases a previously absent forex-predicting hormone into the community at large, a hormone that empowers everyone with an opinion and the skill to predict the future.

But the idea that you can suddenly speculate in foreign exchange and make money, just because it’s through $1 is ridiculous. What could you possibly know about the future direction of the forex markets? What edge could you possibly have on the whole currency trading world? Where could you have possibly got this wisdom from?

There are thousands of professional currency traders throwing themselves on the rocks every day trying to forecast the currency but no, the general public are going to knock them off – seems unlikely.

The real reason forex trading is so heavily marketed to the public is because CFDs got a bad name and this is the next best reincarnation. Another leveraged derivative substitute. The reason it is such a good product to sell is the currency markets tick every second 24 hours a day, whereas equities tick for just eight hours a day. Net result, Forex traders can fit at least three years of equivalent equity trading into one year of forex trading, blow themselves up three times as fast and the platforms that take the other side of their bets earn their keep three times quicker.

Forex is also perfect for charting and on one-second charts its fast and exciting, action all day and all night. Plus, what’s better than an unqualified “two-hour free seminar”, and a smattering of sophisticated jargon and systems to empower you. It’s so convenient and liquid, the software is truly sexy and you can trade while the rest of us sleep.

The currency markets are for business to exchange one currency for another, hedging their risk when they make or receive payments in a currency outside of their own, and the professional systems trader. They are a graveyard for the part-time speculator.

There is no edge for the mortal man no matter how many home-study DVDs you buy. Trading currency is a full-time job for technical experts. Not for idle amateurs. There are some ‘systems’ that appear to work by exploiting tiny margins over long periods of time and then there are the major banks that see the real currency flows (they handle massive currency deals for corporates that have to move money cross border) who then trade around the edges of that information with some chance.

But if you think you can find an edge trading with borrowed money that has you leveraged into a much bigger position than your capital would otherwise allow then you’re going to want to reconsider?

It can be dressed up as sophisticated investment, credit success to brains rather than luck, but the truth is that no-one knows where the currency is going in the short term or long term and any forecasts, amateur or professional are fanciful guesswork rather than a researched likelihood.

Forex trading for retail investors is now a massive business, not because people make money, but because people love to gamble, the only difference is that trading the currency market sounds smarter than gambling. But the outcome is the same.