There are thousands of sites online these days promising huge profits related to forex trading. Below is an explanation of why it is virtually impossible to be profitable in the long run and it is one of the worst investment decisions you can make.
To start we need to understand exactly what Forex (foreign exchange) trading really is. It's simply trading currencies - a bet on whether you believe one form of currency, say the US dollar ($USD) will go up or down in price compared to another currency, say the Canadian dollar ($CAD). You 'buy' a bunch of one currency and then when you think another currency will over take it you simply sell your currency to purchase that of another currency.
What's the Appeal of Forex Trading?
The appeal for companies selling forex software is that it's relatively easy to implement, the symbols all stay the same and the regulations are a lot looser because currency manipulation is much more difficult than stock price manipulation. Companies selling forex tools and investment platforms make their profits off the spread - an execution fee when you change from one currency to another.
The appeal for investors is liquidity. You can trade instantly and you never have to wait for a seller because there are ALWAYS buyers and sellers. The other major appeal for investors is the potential for massive profits, because currency fluctuates so many times during the day if you're on the right end of the buy/sell at every turn even if the currencies themselves hardly move you can make massive amounts of money. That's the dream, anyway.
How much money do Forex Traders Make?
The answer? Very little. In fact, most are suckers that are led like sheep to the slaughter and brought in by fancy analysis and automated software, or with the "Guaranteed" stamp with the little asterisk at the top that you don't even notice. The truth is forex is a zero-sum game. That is to say, you cannot make money in Forex without someone else losing; it's very similar to poker in that manner.
So why can't you beat out all the other forex traders, after all you're smarter than them, right? This is a terrible misconception about forex trading, because it's not just you and your neighbour competing against each other, it's you, your neighbour and the large investment bank on wall street competing against each other. But it's also more than just the dozens of analysts working at the big bank that you're competing against, it's the information they have at their disposal.
For example, suppose a large investment company in China wants to buy a lot of $USD. By doing so they will drive the value of the $USD up, but the problem is that you and your neighbour have no idea the value of the dollar is going to go up because you have no idea this company in China is about to purchase all that $USD. You know who does know? That investment bank on Wall Street, and they know because the Chinese company will actually place the order THROUGH them. Investment Banks not only trade currencies on the open market, but they also serve as facilitators for major trades, so they know in advance how the market is going to move.
In a sense, forex trading for major investment houses is all a form of insider trading, but it's allowed because the public is never deceived. Currencies were never intended to be a public investment vehicle because they serve no purpose for the Government - they want you investing in your own dollar, not putting money into Japan. With a corporation you are buying a piece of that company and you expect it to act honourably and openly with you in every decision that company makes; you cannot expect nor demand the same of a country.
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