Before trading real money in the foreign exchange (FX) market, it’s important to become educated and thoroughly understand the risks associated with trading. Unfortunately, most people that trade FX don’t differ substantially from gamblers in a casino. Anyone who is familiar with gambling and casinos also knows that the house usually wins. Similar to gambling, people who trade FX often develop a “system” that they believe gives them some kind of unique advantage, commonly referred to us an “edge.” Alas, trader’s edges are usually imaginary and more often than not FX traders wind up losing all of the money in their trading account. Trading FX online is substantially more dangerous though, as there is less psychological attachment to numbers on a computer screen then there is to physical casino chips that you can hold in your hand. There’s also excessive amounts of leverage available in FX trading – more so then in any other type of trading available. Typical leverage in a FX account is 200:1 or 100:1. Leverage of 100:1 means that you can control a position with a notional value of $100,000 with only $1,000 of margin in your account! That’s insane!
There was a study done recently that examined data at large FX brokers in the industry over a 4 years period. They found that approximately 90% of the traders lost $10,000 on average and 10% of the traders won $13,000 on average. This study lines up with the common saying that “90% of FX traders will lose their entire first deposit within 1 year.”
If we haven’t scared you off yet and you’re really serious about trading FX, we recommend the following: Trade a demo account for 2 years before trading a live account with real money. Practice trading and learn everything you can about it. There’s no shortage of educational material available on the internet. You can check out our external links and news feeds to find educational material. After having traded a demo account for 2 years, trade a live account with no more than 1/2 of the amount of money you want to eventually deposit, and trade with very small positions for the next 3 years. While trading with a demo account is a valuable learning experience and skipping this stage can be extremely dangerous, it is not a proper substitute for trading with real money as the psychological factors of dealing with real money are not present.
After 2 years of demo trading and the subsequent 3 years of trading with very small trade orders, you may still not be ready to trade live. We strongly recommend all new traders to be very careful and not to rush the process. You will not become a rockstar trader overnight. Planning for the long term and proceeding with caution is the best way to ensure your success.