Go study your way through the School of Pipsology
Whenever a new member posts asking for direction, it's not long before someone posts telling them to go to BabyPips. Why? It is poor advice IMO, not because there is anything wrong with BabyPips per se, but because it is a bespoke forex site dedicated to all things forex. This is putting the cart before the horse and, potentially, is very damaging. Here's why . . .
New traders need to decide which market to trade. Keep in mind two common errors that new traders often make when setting about this task. The first is to go at it like a bull in a china shop and trade indices one day, forex the next and commodities like coffee, pork bellies and oil the day after that. Big mistake: don’t do it! There is enough to learn as it is, without having to get your head around all the characteristics, influences and subtle nuances of lots of different markets. By all means look at different markets and understand how they are correlated and impact one another. That’s highly recommended; just
don’t trade them all! Only trade one market or, at a pinch, two at the very most.
The second common error is to jump on the latest band wagon, without first exploring all the alternatives. At the time of writing, that band wagon is forex. Like moths to a flame, newbies flock towards forex. When asked why, they give answers they’ve been fed by the very people who have a vested interest in them trading forex. What follows is
not intended to put anyone off trading forex, it’s intended to illustrate that one wo/man’s meat is another wo/man’s poison, and that what may be an advantage in the eyes of one trader is seen as a disadvantage by the next. Highlighted in
brown italics are some of the reasons given in favour of trading forex and why it is so popular. The comments that follow are the flip side of the coin: you decide which of the two floats your boat . . .
1. ‘No commissions, clearing fees, exchange fees, government fees or brokerage fees.’
Whilst this is basically true, the implication is that there’s little or no cost to forex traders, or that it’s much cheaper to trade forex than other markets. If your dealer / broker isn’t charging you any commission or other fees, how do they make their money? After all, they are in business and you’re their customer, so common sense should tell you that they’re making money out of you somehow, right? Too right they are, and they do it via the bid / ask spread.
2. ‘No middlemen: spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a particular currency pair.’
Your dealer / broker is the middleman! The big banks won’t deal directly with small retail traders like you, but they will deal with your broker. Needless to say, the prices your broker receives from the banks are much better than the prices they pass on to you! Every time you buy at offer and sell at bid, they make money - and plenty of it.
3. ‘No fixed lot size: in spot forex, you determine your own lot, or position size.’
This isn’t the draw that it once was, not least because there are trading vehicles available today (e.g. spread betting in the U.K.) that allow you to trade most instruments on most markets via a very small account. Besides, if you’ve only got £100 - what are you going to do? Double it to £200, then £400, then £800 - all the way up to a £million? Now, is it both conceivable and believable that you’ll achieve such a feat? Is it, is it really?
4. ‘Low transaction costs: the retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions.’
As mentioned above, the transaction costs are in the bid / ask spread, and this varies considerably from one forex pair to the next, and is often wider than other instruments in other markets.
5. ‘A 24-hour market. There is no waiting for the opening bell: the forex market never sleeps.’
This is as good a reason not to trade forex as it is to trade it. Watching forex pairs can be like watching paint dry. There are plenty of forex traders who never sleep because they’re up half the night desperately hoping for some action after a dull day when nothing much has happened! What would you rather do: stare at your screen 24/7, or trade a highly liquid and volatile market for a few hours and then have the rest of the day to yourself?
6. ‘No one can corner the market. The foreign exchange market is so huge and has so many participants that no single entity can control the market price for an extended period of time.’
This is true, but it comes at a price. It’s the least transparent market there is because it’s not traded through a central exchange in the way that equities or futures are traded through the NYSE and CME in the U.S., or the LSE and LIFFE in the U.K. This has lots of implications for retail traders - especially day traders and scalpers - as there is no level II data and you can only trade at the bid and offer quoted by your broker.
7. ‘Leverage: in forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.’
Again, this is true, but it’s also true of most other markets. Additionally, leverage is a double edged sword, you can just as easily lose a lot of money very quickly as you can make it. Because the volatility in forex pairs tends to be low, many traders over leverage themselves in order to take advantage of tiny price movements. When there’s a news release (e.g. interest rate announcement), price can gyrate wildly in both directions. When this happens, traders who are over leveraged can easily end up incurring a large loss.
There are other reasons why forex may not be the best market for you to trade. With no central exchange, it’s poorly regulated, making it the wild west of the financial world. Scams are two a penny, so be extra vigilant before handing over any money. The relative lack of volatility, (compared to other markets such as index futures or equities), means that there tend to be fewer opportunities to trade and, if you restrict yourself to the pairs with the tightest spreads, the number of trading opportunities are further reduced.
In spite of the above, forex may well be the best market for you to trade. Just be sure to choose it for the right reasons, having carefully assessed the pros and cons of all the available markets. Remember, there are very few absolutes in trading; one trader’s reason to buy is another trader’s reason to sell. Whatever market you’re considering, look carefully at the reasons for not trading it to see if any of them apply to you. Don’t just follow the herd or accept what others say at face value. Most don’t know what they’re talking about and, certainly, they won’t have your best interests at heart. As always, do your own research and draw your own conclusions. If you’re confused by what’s written here about forex and you’ve no idea where to start, then as good a place as any is with this FAQ:
Which Should I Trade - Stocks, Futures or Forex etc.?
If a new trader - artweek in this case - does decide to trade forex, then sites like BabyPips may provide interesting and helpful content that assists their trading. Until then, the new trader will do much better to soak up the numerous resources available right here on T2W, most of which are aimed at all traders - regardless of which market they trade.
Tim.
