When most new investors first hear of the FOReign EXchange (FOREX) market and the types of returns possible with the type of investment leverage possible in that market, dreams of automated forex trading software growing their wealth exponentially dance through their heads. The same thing happens in the commodities markets (partly due to the lack of good commodities funds), the index futures markets, and most other loosely-regulated markets. It is important, however, to keep things in perspective: investing in the forex market isn’t going to make you rich overnight. It’s most definitely a slow-and-steady-wins-the-race proposition.
The Root Of Outrageous Expectations
Because of a lack of wide-spread understanding of the risk and reward characteristics of investing in currencies and lax regulation, the forex market has been labeled as a hotbed of fraud. Because of this, get-rich-quick schemes claiming to be able to teach you to generate huge returns in the forex market abound. Practically everybody has heard horror stories of somebody losing their shirt following one of these schemes. My response to this is to say “use your common sense, people”. If something sounds too good to be true, it probably is. There are many ways to earn a high return in the various financial markets, but to think there is some magic method that can make you rich overnight with minimal effort is just naive.
Large banks and international corporations dominate the foreign exchange market in the course of their everyday business. Banks like to hedge their currency exposure and corporations with operations in several different countries and currencies use the forex market to dampen the price volatility of raw materials and the price they can charge for finished goods. Because foreign exchange is dominated by such large players, the market can quickly turn against small players. If you’re not on top of your game, well-informed about the relevant macroeconomic trends, and possess more than a little bit of luck, you can easily get burned.
None of that is to say you can’t make money trading currencies with automated forex trading software. You can! But using minimal leverage, paper trading a fake account for a while before putting real money on the line, and doing tons of independent research will maximize your chances of making a significant profit and, more importantly, minimize your chances of suffering catastrophic losses.