Is forex good or bad?
Economic data and geopolitical developments ultimately strengthen or weaken a currency. However, interpreting these fundamental factors is not easy. Strong economic data may even keep a currency weak due to some other reason. For example, the Japanese yen often has an inverse correlation with the Nikkei index. When Nikkei Index rises, the yen may decline even if the recent economic metrics has surpassed the estimates of analysts. Traders who had taken a long position based on good macroeconomic news would have lost if they had used tight stop-loss orders.
An incident supporting the above argument can be seen in the life of John Maynard Keynes, one of the greatest economists of all times. Keynes was responsible for the foundation of World Bank and International Monetary Fund. He was well known for his path breaking theory that rubbished the idea that free market would automatically provide full employment. He ventured into currency trading at the end of World War I and pooled his friends’ money into it. Obviously, a person of such a stature was expected to perform exceedingly well by identifying big trends in European currencies. However, to the utter disbelief of everyone, he lost all the entire capital. Currency trading proved to be very difficult for such a renowned economist.
Many a times, a retail trader may not get the unambiguous view of the situation. That may result in erroneous judgment. A currency which may look weak could be actually consolidating to go up as macroeconomic factors may be favoring an uptrend. The rise of the greenback after the 2008 financial crisis is a good example. The US dollar gained against the G10 rivals as soon as the 2008 financial crisis broke out. Many had expected the greenback to lose value. Instead, the opposite happened as markets across the world fell short of the US dollars required for day-to-day operations. The US Federal Reserve, the lender of last resort, had to step in and fill the void. Ironically, the financial crisis began with the US based Lehman Brothers filing for bankruptcy. Thus, traders and even some analysts expected the greenback to plunge. Only those traders who had thorough knowledge of the entire banking system could have made money or at least protected themselves. Not all retail traders are privileged to receive crucial information.
The inclusion of the Chinese yuan as the reserve currency by the IMF has added another layer of complexity to the Forex market. It is very hard to clearly guess or know what is happening in China. Thus, an unexpected real estate, stock market, or corporate credit crash may have far reaching implications across the globe, and retail traders are certainly ill-equipped to meet those challenges.
It is not uncommon to see Forex brokers offering a leverage of 1:500 or more. A trader who does not have an ability to manage risk will soon lose his entire capital by using a high leverage. To increase the overall trading volume, Forex brokers offer high leverage. That encourages beginners to select a wrong leverage and lose their hard earned money. The inadequate presentation of the low margin requirements by FX brokerage companies further increases the vulnerability of retail traders.