Forex Trading And Scams

Because Forex Trading is relatively new in terms of the average investor being able to make money in the currency markets, there is a lot of speculation as to what kinds of returns are considered to be the status quo. In fact, if you look on any forum that deals with forex or yahoo answers, you will find the it will be peppered with questions such as "how much can I make with forex"..."can I make a living trading forex?"....."is forex trading good for beginners?". If you continue reading over a period of time, you will find even more ridiculous questions like "could I double my money in a month with forex trading?".....or...."I was at (insert scam website name here) and it says that I can expect a 4% per day return on my investment..is this possible?"

For those of you who are completely new to forex trading, I implore you...use some common sense...the old adage 'if it sounds too good to be true...' should be employed here. I know that many would love to think that making huge returns quickly is possible (these are mostly wishful thinkers or complete forex newbs), it simply isn't. And because forex trading is fairly new arena, you are going to find a lot of con artists that can't wait to separate your money from your ignorance.

Am I being too hard on these poor individuals? Probably...but the point I am making that most of the forex beginners aren't asking the right questions. They have the dollar signs in their eyes. Their vision is clouded and the money that they think they will make has already been spent before they have made it.

I think rather than asking "how much can you make trading forex?", the inquisitive should instead be asking "how much can you consistently make with forex trading?" And that is the key.

Five years ago, I was one of the ignorant that I am currently bashing. I got into forex trading after suffering some losses from a scam operation (based in the Asia) called PIPS "traded" away nearly $2,000 of my money. I learned of this company from a friend of a friend who actually flew to the country and met the owner (Bryan Marsden). He was convinced that what Bryan was doing was legit and actually had collected over 100k from his investment over the period of year.

Just to let you know exactly how stupid I was, I thought that Bryan was actually trading forex and consistently making 4% COMPOUNDED daily. I wasn't alone. There were nearly 100,000 of the "bungled and botched" out there hanging their hopes and dreams on the shoulders of this con artist.

And the sad thing was, the longer that the company existed, the stronger the belief that he was doing the trading was. And even after the supposed company was defunct and Bryan was gone, there were still hordes of people who believed that their ever growing account would eventually be theirs for the taking.

When PIPs disbanded, I started looking into trading. I didn't want to get hoodwinked again. At the time, I still believed that you could make a ton of money trading the currency markets. I still had visions of making a killing, quitting my day job and purchasing an island in the bahamas. Five years later and although I have made money (and lost money), I have learned that just like everything in life, nothing good comes from easy.

Currently, there are probably 2,000+ sites that claim to trade the forex markets. Some these supposed "forex traders" claim to be able to make as much as 100% ROI in one day. Most fall between 1%-4% a day though. And I am here to tell you, if you think that you can make 30% per month ROI consistantly, then you really need to check your head.

Well, I know that this rant is abit winded so without further ado, here are some realistic expectations that all of you forex trading beginners can look at:

• Expect to have some good luck initially out of the gate with your DEMO forex account- Call it beginner's luck or the god's trying to play tricks on you but most beginner forex traders wind up having substantial gains that kind of lulls them into believing that they are ready for a real account. Trading with REAL money will do some crazy things to your mind, especially if you are on the losing end.
• Expect to lose...initially- Best case scenario is that you don't drain your forex account within a couple months (what most will do) and actually learn from your mistakes. Worst case scenario is you lose really quickly and decide to throw in more money (can we say degenerate gambler?) to try to get back to even.
• Expect to become partially bald from pulling out your hair- My first year of trading, I had a semi-permanent bald spot on the side of my head made primarily from me yanking it out whenever I couldn't cancel a trade quick enough.
• Expect to become obsessed with new 'tricks', 'systems' and other con jobs out there- Over the years, I have tried a couple dozen guaranteed systems out there. The "system" I use now is what I consider the fundamentals of forex trading., such as dow theory and how it applies to forex trading, support and resistance bands in forex, how to use leverage when dealing with forex trades and understanding how risk and rewards work in forex trading
  
• If you are forex day trading, expect to be glued to the screen for hours looking for good entry points- The notion that you will be loosening the chains of that J-O-B is replaced with the shankles next to your computer.
  
• Expect months of great returns followed by streaks of no returns- This is for real...My second month of trading, I pulled in a whopping 20% ROI. I thought I hit the promised land (granted, my account was smallish). The next couple months after that, I gave it all back to the house and then some. Oh well, back to the drawing board.
• If you are lucky, expect to make more than your average mutual fund in a year's time- Yeah, you heard me right. There is money to be made in the forex market. But just like the stock market, it is a zero sum game. Everytime you are a "winner", there is someone out there wondering what in the heck just happened ("loser).

That is pretty much it for today. I was planning on getting into how to spot a forex scam, but figure that you can figure that out on your own (I may revisit this later). The bottom line is that because forex trading is fairly new (to the regular investor), the idea of what you could make trading forex is saturated with presuppositions and myths. The only way for you to truly realize what you can make is to get a trading account for yourself and test it out yourself. I'm out.

Risks of Forex Trading | Understanding Risk vs. Reward

In the last post, I briefly went over how to use leverage in forex trading and more importantly what NOT to do when you are first starting to trade on the foreign markets. In this post, I am going to expound on this by going over the risks of forex trading...most notably how to use a risk versus reward ratio to exploit forex trading and actually not lose your butt in the process.

Do You Understand Your Risk Versus Reward?

I hate to beat a dead horse but understanding risk versus reward is probably one of the biggest (yet untraveled) roads out there and I actually learned how to do this several years ago when I first started doing sports gambling.

The reason why I ask this is because understanding this is paramount to how much money you will want to risk. Establishing and understanding the risk/reward ratios will help you with understanding exactly how much leverage you will want to use. Once you understand this, you will realize that not all trades are created equal. I will repeat this....

NOT ALL FOREX TRADES ARE CREATED EQUAL

One of the first rules that you will need to understand is that when you are making trades, you should always examine the risk/reward ratio. In sports gambling it is no different. You want to find the entry/exit points that will maximize your reward while limiting your risk.

The reason for this is simple. If you can stick to a disciplined plan of attack and know how to maximize your risk/reward ratio, then logic would say that you will come out ahead.

For instance, if you have measured the risk/reward ratio to be 3:1, then you can safely ascertain that all you need to win is 1 trade (with the spread in mind) and lose 2 trades to break even.

So, once again, let's use a real world example....

Let's say that you have found a good forex trade that looks like in all likelihood it will be profitable. All things point to the market moving in the direction that you want it to. Now, you ascertain that the risk/reward is 4:1. You have established that you won't enter a trade that is less than 3:1.

In layman's terms, you are betting that for every trade you make, you only need to win 1 out of 4 to break even (without a spread...it would most likely be 1 out of three with a spread).

Great, you say...but how do you determine what your risk to reward ratio is? What metrics and variables can you use specifically for forex trading?

To understand this, you will need to understand Fibronacci retracement levels. Since you probably haven't gone there yet (assuming you are an amateur forex trader), I will try to explain it in layman's terms.

Basically Fibronacci was this Italian mathematician that published a very important book on calculations. What Fibronacci did was create a series of numbers where if you added 1 (+1) to the previous number, you would get the next number. Here is an example...

1,1,2,3,5,8,13,21 and so on.....

Now if you divided two subsequent numbers on the list, you would get a ratio. The further along you go, the close to phi you get.

For our purposes, the three numbers that are most commonly used in forex trading are .382, .500, and .618.

These numbers will actually help you establish a risk/reward ratio...

So, let's use a real world example....

As you can see from the image above, I have a downtrend (this is a 30 minute chart). I have also added the Fibronacci numbers here. Notice how at the .382 retracement that it sits there for a second. Now take a look at the next jump....0.618.

How I would calculate my risk is by setting point A (which is the highest point) and then point B (which is the lowest point). I would then do the math (or in this case, my trading platform does the math for me) to get the retracement values. I would then go to the risk probability calculator (which is free by the way) and see whether me making the forex trade will be worth the risk.

Hindsight...20/20 right? Sure. You can view this however you want. It is obviously easier for me to look at this after the fact and see that if I had made this trade at the lowest point, I would gain 40 pips if I stopped it at its current point (where the uptrend is seeming to meander). But that is part of the game....doing your homework, finding the trend and capitalizing on the trend.

If you are wrong, so what? You can't win them all but if you constantly temper your trades and only go after the ones with a high risk/reward ratio, then you can buffer the losses.

Oh, and by the way...here is the risk probability calculator for you.

I have rambled on enough for the day. To sum it all up, if you don't understand the risks of forex trading, then you are cheating yourself out of potential good money. If you don't understand how to manage your risk to reward ratio in your forex trades, then you might as well be at the casino betting on red or black. The risks of forex trading are just too high to be playing around with.

How to Use Leverage in Forex Trading

Understanding leverage and how to use it can be the difference between you going broke very quickly and you actually making money. I occasionally read a forum post where some guy claims that he made x amount of dollars trading forex with a 100:1 margin and while it is possible, it is also extremely risky. Most beginning forex traders simply don't understand what they are betting when it comes to leverage. Forex trading can be extremely risky and the higher the leverage the higher the risk. Hopefully after you have read this, you will understand why playing with a high leverage is alot like playing with a loaded gun.

I have one caveat to say before we enter this realm. Just like sports gambling (something that I know a thing or two), forex trading can be a goldmine for those that understand the risks associated with it. With just a little knowledge on how things are run and with a couple technical indicators, you can make money on the FX market. However, just like sports gambling, if you bet the farm on one game and lose, you are taken out of the race. The foreign exchange market is no different. And the fact that you can leverage large currency amounts (lots), makes this endeavor very risky. That said, those that profit the most understand when to take risks and when to sit it out. We are going to explore this today...

Understanding how Leverage Works

The forex market works in using PIPs. A PIP is worth roughly 1/100th of a penny. Needless to say, this little amount of money is hardly worth trading, right? Well, in the forex market, most traders will work with lots which is 100,000 units of currency. In other words, if the USD/Euro pair was currently being traded for $1.0054, then one lot would be worth over $100,000 if the trader was risking his own money dollar for dollar (1:1)

Now most traders don't have this kind of capital to trade with. This is where leverage comes in and the confusion begins.

Here is a real world example:

You have $1,000 (which is low by the way) and decide that leveraging at a 1:25 level would be good because you can make a ton of money quickly...pay off the mortgage and retire in the bahamas by next year. At least that is your dream. After all, by leveraging 1:25, you are essentially controlling $125,000 dollars (assuming you are trading lots, not mini-lots because after all, you are a dreamer).

So, you enter a trade, with those dreams of getting rich quick in mind. However, the market moves against you. How much can you lose before you get that margin call? If you answered 2%, you would be correct. So, of the market moves against you and you lose 2% of your bankroll, you will be standing on the sideline with all the other forex trading amateurs wondering what in the heck just happened.

The end result is you get a margin call and are left with two choices:

1. Liquidate Your Account and call it a loss.
2. Add more money to your account.

It is safe to assume that most beginner forex traders don't have the capital to add more money to their account. In fact, most people who begin forex trading just think that it is a way to get rich quick.

Now, while this is a hypothetical example, don't think for a moment that it doesn't happen. Forex trading is full of losers who bet their bankroll without fully understanding the risks. And the worst part is that this margin call that I used in the previous example is conservative....most forex traders trade with 50:1 - 100:1 leverage. Forex is risky folks but playing with such a high leverage and you would be better off taking your chances with jumping in front of a moving train and hoping to live.

How to Use Leverage in Forex Trading

Since we have established that using too much leverage can be catastrophic to your account, let's examine how much leverage you should use when you are trading forex (or any market).....

A good rule of thumb is to not use more than 60% of your margin on any one trade. I think that this is a bit high personally, but you can decide for yourself what kinds of risk you are comfortable with.

If you are just starting out and getting a feel for the market using real dollars, chances are you are going to want to start small. 1:10 leverage is a good place to start because:

• It allows you to actually lose a few trades and still be in the game.
• It allows you to get a feel as to how much leverage is too much leverage for your risk taking.

Pay special attention to point #1. Staying in the game should be your number one goal. If you don't know how to use leveraging in forex trading, I would say that your chances of staying in the game aren't great. Learning how to leverage and when to leverage will most certainly increase your odds of not going broke quickly.