The currency market is the largest and most liquid financial market ever. However, it is a very limited percentage of traders who achieve success in this exciting world. Although some blame the lack of self-discipline and poor trading strategy for the vast majority of losses, there are some factors inherent in the forex market that make it a very dangerous place. We'll meet in the next lines look at these factors make the forex market an ideal place to profit.
Difficulty to predict
Economic data and geopolitical events affect the value of currencies both negatively and positively. However, explaining these fundamental factors is not an easy task. Some positive economic reports may weaken the currency, not strengthen it as expected, due to its correlation with a number of other factors. For example, there is an inverse relationship between the Japanese yen and the Nikkei. When the Nikkei rises, the yen usually falls even if economic indicators come in better than analysts ' expectations. Therefore, if a trader opens a purchasing position based on positive economic data, it will face a loss if stop orders are placed at close levels.
One evidence supporting this argument is the sensational events in the life of John Maynard Keynes, one of the most important and greatest economists in human history. Keynes was responsible for founding the World Bank and the International Monetary Fund, and presented economics with one of his most important theories ever, which broke the myth that the free market could automatically achieve full employment. With the end of World War I, Keynes decided to enter the currency trading market and even raised money from his friends for this. Of course, a person with such a mighty mind was supposed to be able to achieve a resounding success as the abundance of his knowledge would have helped him predict the main trends of currencies. However, against all expectations, Keynes lost all his money. Many cite this example as a sign of how extremely difficult it is to work in the forex market even for an economic mindset in the niche of John Keynes.
Lack of consistent expectations
It often happens that a trader fails to read the situation in the currency markets correctly, which ultimately leads him to wrong conclusions. For example, a currency may be in a state of weakness, but it's really just a consolidation phase before starting a new uptrend supported by some macroeconomic factors. The most prominent example is what happened to the US dollar after the global financial crisis in 2008. During this period, the greenback achieved the best performance among major currencies once the spark of the financial crisis broke out. The overriding expectation was that the US dollar would incur heavy losses, but the opposite occurred due to the diminishing liquidity available from the dollar to monetize day-to-day operations within the financial system. Forced fed then to increase the money supply to meet the liquidity squeeze. Ironically, the financial crisis itself began in the United States after the bankruptcy of Lehman Brothers, which led many traders, and even analysts, to expect the greenback to depreciate. Unfortunately nobody has been able to use this result only a limited number of traders who have informed on the mechanisms of action in the banking system, which helped them achieve some profits or at least protect themselves from the losses incurred by others. Certainly not all or even most individual traders have the advantage of having access to such important information.
China's rise as an economic superpower
The inclusion of the Chinese yuan in the reserve currencies of the International Monetary Fund has increased the complexity of the forex market. It is very difficult to know or even guess what is happening in China, so many fear that any unexpected crisis in the real estate, equity or corporate credit markets will have serious consequences for global markets, and of course individual traders do not have the tools to deal with these challenges.
High odds of losing the entire capital
It is common to find some forex brokers offer their clients leverage up to 1:500 or more. Therefore, a trader who does not have the ability to manage risk will lose their capital sooner rather than later due to failure to employ such a high level of leverage. Forex brokers resort to offering high levels of leverage in order to increase trading volumes, but unfortunately it indirectly encourages novice traders to lose their money in a short period of time. In other words, the sponsored promotion of lower margin requirements by forex brokers increases the likelihood that individual traders will suffer heavy losses.
Forex cultivates greed
In some cases that achieves rolling profit by 100% in just a few minutes thanks to the use of large leverage like 1:100. This instills a sense of overconfidence within the trader, who dreams of achieving returns of up to 400% or 500% in a week or even a day using leverage. This ultimately exposes the balance of the account to enormous risks that in most cases end in complete loss of its funds as a result of this greed.
Addiction to currency trading
The forex market operates 24 hours a day and 5 days a week, making trading opportunities available at any time. This uninterrupted flow of economic indicators and geopolitical news from around the world naturally creates trends for at least a number of currency pairs at any given time. Taken together, these factors lead the trader to fall into the trap of overtrading by repeatedly buying and selling and holding many open trades most of the time. Of course, increasing the frequency of trading in a way that is unreasonable leads to an increase in the number of failed trades, a situation that causes the trader to enter a vicious cycle of retaliatory trading to compensate for losses, and consequently fall into the trap of trading addiction in a way that may even adversely affect his health.
The forex market is exposed to sharp fluctuations most of the time. Unlike the stock market, which is not usually affected by political events in distant countries, currency markets are affected by all the news that comes out so there may be a sudden spike in volatility at any time. This requires the trader to follow charts and political news, as well as to know when the next news will be released to calculate. However, some traders often rush in or out of their positions earlier than planned, often resulting in unnecessary losses. Inexperienced traders easily fall under the emotional influence of these pressures and emotions, which often harms their health and personal life.
An industry full of fraud.
Choose a honest broker in the forex market is not an easy task, it requires a great deal of skill. The foreign exchange market operates outside the official exchanges ' booth and is therefore a hotbed for scammers as it is easy to set up brokerage firms on remote islands and entice new entrants to join them. There are countless stories of fraud on novice traders who fall victim to such fraudulent businesses and lead in most cases to the loss of all their investment.
These victims often do not have enough time to learn to trade and look for investment opportunities, so they fall prey to fraudsters who claim to be experts in the trading world and seek to persuade others to invest their money with them and achieve significant returns. The fraudster disappears within a short period of time, leaving his victims to lose their investments.
The lack of confidence in a new forex trader also causes him to seek support from more experienced others. Scammers take advantage of this point by establishing sites that offer recommendation services for a certain fee. These types of sites also display fake records of past performance with impressive results that are impossible to achieve on the ground. Naive traders who are attracted to such services end up losing the money they paid for subscribing to recommendation services as well as losing the entire capital as a result of entering losing trades. This is because beginners find themselves having to follow these recommendations without even having the ability to understand why the losses they incur. These erotic stories of cheating and scams always instill a sense of fear in the soul towards the forex market.
The above facts explain why the forex market may be an imperfect place for many, and why those who do not have the time or ability to educate themselves should avoid it. Those who have this desire and ability to learn from their mistakes and dealing with this activity with the desired quality, they have the opportunity to achieve success from trading in the currency market.