Traders Magazine
July 2006

It is no secret that the Foreign Exchange market, or Forex market, has become a hot topic for retail investors over the course of the last few years. I am sure you have heard the claims, “Start with $10,000 and finish with over $300,000″ or perhaps, “We have a system so powerful it is guaranteed!” And while it is true that the Forex market has many appealing qualities for the retail investor, there are many dangers to be wary of as well.

So many traders come into the Forex market with false expectations. They have unrealistic ideas regarding profit potential and they lack or are unaware of the discipline required for trading. Short term trading is not an amateur’s game and it is not usually the path to riches or financial freedom. If you only have a small amount to invest and you have limited experience with currency trading then the Forex market may not be the place for you.

And if that hasn’t frightened you off, as of this writing, the Forex market is not subject tot the same degree of regulation that you find in the other financial markets. Do a quick search on the Internet for information on the Forex market and you will likely find claims of guaranteed profit too numerous to count. And if you look closely at some of those websites you will find that the companies behind them are often located in small countries where regulation is weak or non-existent.

Still this isn’t enough to dissuade hundreds and most probably thousands of people from opening new Forex trading accounts every single month.decline against the yen. Japan’s Nikkei index then fell 3.3% to solidify the worldwide retreat in the equities market.

This current popularity can be a double edged sword for Forex brokers. Quite a number of new people are being brought into the market by the lure of quick riches. However, many of these new clients open accounts, quickly lose the bulk of their investment and become disgruntled with their broker and the market in general. Had some of these people been better informed of the risk associated with the Forex market and had they spent a little more time educating themselves the outcome may have been very different.

One of the appeals of the Foreign Exchange market is its liquidity. Just over $1.9 Trillion dollars are traded in this market on a daily basis. That number is staggering and alone is enough to lure an eager trader. Another benefit is the market hours. The individual investor can trade in the Forex market around the clock form the opening of the Australian markets on Monday morning to the US close on Friday afternoon. This flexibility allows investors to trade on their own schedule rather than being limited by a single market’s hours of operations.

There are many companies out there willing to help an investor get started trading in the Forex market. This can make it difficult for the average investor to choose a broker that will suit their needs. As with any investment, it is in your best interest to do your homework and ask questions. Once you have narrowed your selection down to the 3 or 4 brokers that meet your standards and provide the services you require, download their demo trading platforms. Almost every broker on the market today offers free trial accounts of every shape and size. Open a realistic demo account (there is no sense opening a $50,000 demo account if $500 is what you have to invest) from each of your selected brokers and then try to make the same trades in each account. This will allow you to accurately compare your broker’s abilities, customer service, training, and platforms. It should leave you, at the end of the demo trial, with a broker that meets your requirements and makes you feel comfortable.

Another resource not to be overlooked is your local Forex user group. Many cities not have local Forex user groups and these are good places to get started if you are serious about getting into this market. If you don’t find one in your city, there are plenty of online user groups to become a member of. Look for a place where honesty is encouraged and respected but being disrespectful, flaming, and blatant spamming or advertising is dealt with quickly and efficiently. These groups tend to be great support mechanisms for beginning traders.

We also highly recommend doing some research and educating yourself. It is truly amazing the wealth of information that is freely available on the Internet. It is also important to identify and develop your own style. Do you find value in technical information, fundamental information, or both? Do you prefer to remain in a trade over the course of minutes, hours, days, weeks, even months? What hours can you trade? How much time can you spend looking at your charts and making decisions? How much money are you willing to risk to make a profit?

If there is one thing that you take away from this article let it be this: Investing in the Forex market is not easy. It can be profitable, but it is not easy. However, your chances of being successful are greatly increased when you take the time to understand the risk, educate yourself about what moves the market and put together a sensible trading plan that suits your lifestyle.