Why Forex Trading Is Not A scam
Why Forex Trading Is Not A Scam
A lot of people, even some traders all around the world often talk about foreign exchange market as being a slaughter house where novice and even professional traders get chopped up.
I won’t judge yet, but if I were you, I will definitely make sure I’m convinced about what the truth is. This informative article is well crafted out and presented in such a way that appeals to your emotional and logical reasoning, helping you see reasons why Forex trading is not a scam.
Foreign Exchange Market – A Pure Market
Of all the financial markets, the Forex market can probably be considered to be among the most “pure” in the sense that SUPPLY and DEMAND is strictly what determines prices.
After all, in the market that trade about $5 trillion a day, government intervention can only go so far that at the end, traders around the world act as Adam Smith’s invisible hand in guiding prices. So, Supply and Demand is a key factor in the forex market.
Although due to decentralized and global nature, Foreign exchange market has been prone to foreign exchange fraud and has been less regulated than other financial markets.
The Parties Involved in Trading Tells a Story
If the turnover of the Forex market each day is trillions of dollars, then the question is “who are the parties involved in trading this huge amount of money?” To simplify this, we can divide the FX market into the four major types of participants like:
- Market makers (Dealers, Brokers)
- Corporate accounts/Multinationals
- Speculators like hedge funds, CTA (Commodity trading advisors), COMs (Currency Overlay Managers) and;
- Central Banks
1. MARKET MAKERS (DEALERS, BROKERS)
Banks are the only ones with deep enough pocket to handle the biggest Forex transactions ranging from billions of dollars. Brokers come in here since everyone cannot trade directly with a bank.
Though broker’s role in the market should theoretically be limited to provide liquidity for their clients, in reality much is expected, a good broker or dealer is meant to generate profit for the company by actively trading against their client base. Now you may begin to think why will my broker trade against you? And does this make forex trading scam free? You may start to conclude that Forex is a scam because of this but soon, you’ll find an answer to this in this article. Let’s quickly run through the other three parties involved in Forex trading.
Multinationals are the bread and butter of the foreign exchange world and are by far seen as the most logical participants in FX markets. Along with insurance and pension funds, they are known as “real money” accounts as opposed to the leveraged crowd that borrows substantial amount to trade.
For example the Coca-Cola’s and the blue chip companies of the world receive and make payments all over the world which necessitates their investment in the foreign exchange market.
Since corporate clients are not particularly a speculative bunch, they are primarily interested in hedging flows through the forward market. For them, the less volatility, the better.
Speculative traders come in all shapes and sizes and tend to be the most interesting bunch in the FX world. Their primary aim is to generate profits through their views on the market, as opposed to simply collecting transaction fees (brokers) or using FX as a means to an end (corporate accounts).
The big players in this group include prop desks (banks trading their own proprietary accounts), hedge funds, commodity trading advisors (CTAs), and currency overlay managers (COMs).
These traders have an appetite for risk and a put-your-money-where-your-mouth-is mentality. But their use of leverage also means that they are more prone to “blowing-up” than other participants. Along with dealers, they are responsible for the majority of intra-day moves of the market.
4. CENTRAL BANKS
The central banks of the world act as the administrators of the FX market. Each national bank is responsible for her currency and it is no secret that they often play active roles by gently pushing the market in their preferred direction. Central banks hate to see their currency being used for speculation.
Though their primary aim in the FX market is to reduce harmful volatility, if fundamental imbalances exist, they will sooner or later be reflected in the exchange rate.
Since Central Banks love to see speculators get hurt, interventions in the market are made at strategic moments to catch the market off-guard, and smaller countries may choose to close the doors to speculators altogether by limiting capital flows.
By now you should start seeing the reason why the Forex market itself is not a scam because of the roles each of the parties play in the market.
Scams are everywhere and traders have to face this reality in Forex industry. There are a lot of people out there looking to take advantage of new entrants into the foreign exchange market and also, experienced traders also fall victim.
Forex is Not Gambling, You Just Need to Know How to Trade
Forex itself is real. It is not a scam in any way but also, it is not a get rich quick overnight business. I have seen a lot of traders trading Forex like it were a gambling stuff; gambling comes with lots of uncertainties and risks.
I don’t know what you have seen or heard. Don’t make it a priority to be rich overnight. Like other businesses, Forex business is profitable but there is no free lunch you need to do your homework too.
I could remember a good example of a 59 year old house wife called Yukiko Ikebe, I read about her trading experience and expertise in the foreign exchange market. Her story inspired the head of foreign exchange in Tokyo to proclaim that “She must have made more than us! Find her and hire her!”
These outstanding individuals have learned not to “fight” the market because the market is certainly not fighting them. So they instead focus their attention on taking whatever the market is willing to give them. You also need to do your homework to look for what works for you.
The interbank market is by no means a perfect market since information is not freely available, market access is restricted, and manipulation takes place. Governments intervene and a large number of participants routinely buy and sell irrespective of profit, which all comes together to turn into a conventional trading wisdom (such as “let your winners run, cut losers short”) in this mostly range-bound market.
The FX market is unique as compared to other markets. If you can find a way to recognize, predict, and exploit these imperfections. Then there is a great deal of money to be made. Profitable trading strategies do exist and can be found.
You may start to think about the word “manipulation”; yes I did talk about manipulation because brokers manipulate sometimes when they are trading against you which I will still explain.
Forex Trading – A Vehicle for Other Transactions
Remember Forex market has never been a value creator but a vehicle for other transactions which. This also backs it up that Forex trading is not a scam business.
For example, a portfolio manager buying Japanese stocks or an Italian company acquiring raw material from Brazil both inadvertently become FX participants, yet their currencies which is part of their transaction are not usually motivated by profit.
The portfolio manager simply needs the Yen to buy the stocks and the company needs Dollar to buy the coffee. This type of behavior breeds inefficiencies eagerly exploited by more active market participants and fortunately for individual FX traders, small arbitrage opportunities still exist. This reality of exchanges in currencies is triggered by the need for parties involved to exchange value.
Although the market may be very efficient at giving you a price, whether that price is an accurate reflection of the currency’s true value is another story altogether. That is why good analysis and trading techniques do pay off in the long run.
There Is Nothing Easy About Trading Currencies
Warren Buffet lost $850 million speculating on the Dollar. George Soros’ short Yen speculation cost him $600 million, not even once but twice in 1994. Don’t they know how to trade or have a good strategy? The sincere truth is that you will always have drawdowns. The same people we just talked about have made tremendous amount of profit in the market. Now, let’s talk about the manipulation.
WHY DO BROKERS MANIPULATE THE MARKET?
Why the manipulation? Not finding satisfying answers to this can make you think that Forex trading is a scam or maybe not.
Have you ever had your stop hit at a price that turned out to be the low or high for the day? Bad luck right? Maybe Yes. But what if it happens more than twice? Do you feel like the market is out to get you or you start to think Forex is a scam?
The truth is that: it is not the Forex market itself. It is the brokers or dealers. There are a lot of dirty brokers practices like stop-hunting, price shading, trading against clients and no dealing desk realities, freezing the market and so on. But all this does not make Forex itself a scam business. Every participant in the market is trying to make profit and the strategies applied to make this profit could be positive or negative.
The truth is that some brokers trade against you because they have to, sometimes not because it’s not in their interest to see traders prosper but because they have to.
Don’t forget that brokers are here to help retails traders to make trades, so what do they have as their gain? You may start to think brokers use the SPREAD. Yes you are correct. But what if you are a broker and you have a client who always lose all his money while trading, is that not money for you? Some brokers who have noticed a losing client make more money by trading against the client. That means if their client wants to buy, they sell to him and vice versa.
So that is the reason some brokers trade against you and make money for their company. Unfortunately, the vast majority of retail FX traders are just not very good in the long run.
After all if market makers profit by trading against their client base then their client base must be wrong most of the time for them to make money.
WHAT YOU SHOULD KNOW ABOUT FOREX BROKERS
You know what brokers want? (your money) and you have a rough idea of how they will come after it (running stops, shading prices, fading moves, freezing the platform etc.) All that you now need is a way to exploit these actions to your advantage.
Many of these are exactly the same techniques used by hedge funds and CTAs to exploit loopholes left by their dealers or brokers which can also be used successfully by the retail trader.
Make no mistake about it. There is a lot of money to be made in currency trading; you just have to know where to look. Sidestepping traps set by brokers is one simple way of improving your daily profit or loss, but it is surely not the only one. This brings us to another question.
CAN A BROKER LOSE MONEY?
Yes, a broker’s nightmare is a runaway market where they are forced to either stop quoting prices or continue taking the other side of the trade and risk being stuck with a losing position.
In general, any one way market is bad for dealers since prices do not retrace and they are forced to eventually unload their position at a loss.
All brokers know that if you could, you would probably rip them off in a second, so why should a broker treat you any differently? Not all traders will like to rip off brokers, definitely I am confident to say there are also some brokers that are clean.
As Chinese General, Sun Tzu once said “Keep your friends close and your enemies even closer” All traders should heed this advice and keep a watchful eye on their Forex broker.
Since all brokers are different in terms of commissions, spread and other things, your strategy should define the broker you need. So once again, Forex trading is not a scam.
WHAT OF THE REGULATION?
The U.S Commodity Futures Trading Commission (CFTC) is an independent agency of the US Government created in 1974 that regulate futures and option.
However, some countries do regulate Forex brokers through governmental and independent supervisory bodies (examples are National Futures Association and The Commodity Futures Trading Commission in the US, The Australian Securities and Investment Commission in Australia, and The Financial Conduct Authority in the UK).
These bodies act as watch dogs for their respective markets and provide financial licenses to organization or broker that comply with their regulation.
FAILURE OF STRATEGIES AND TOOLS
Lastly people call Forex business a scam because they have bought a lot of tools, robots strategies, indicators and so on. That does not provide profit. This is funny; will you call any business a scam because the strategy you employed didn’t work for you? You know the answer already.
Working strategies exist. It is up to you to choose the right one. Nobody is forcing you to buy this or that. Track records in terms of profit and loss management will speak and guide your choice of trading tool, not just a cool website.
There is a saying that if you don’t like your country create yours, the same goes for Forex trading, if you don’t like the strategy you are using then create yours.
Trading is one of the few professions that enable you to quantify exactly how good you are since all it takes is a quick glance at your profit or loss.
How do consultants, engineers or even managers know they are good at what they do? Is it not through a combination of peer respect, promotions and recognition alone that they use for measurement? And how do they know if they had a bad day? Is it not traffic and problems with their suppliers?
Now imagine being able to look at your screen at the end of the day and let it tell you how the day was. For traders the measuring stick is money. If you make more money than the guy next to you, that must mean you are better at your job than he is, and if you lost money today that means you had a bad day.
The ability to look beyond the obvious facts and figures, to think of the market not only from an objective standpoint but also from a subjective view, is what sets great traders apart. Average traders look to the left-side of the chart, great traders look to the right.
I hope that by now, if you are being asked the question about Forex trading being a scam business, you now know better.
I will like to know your point of view on this article. I am not here only to share with you what I know or what I think is right, I really want to know your wonderful opinion. Please use the comment box below.
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