“I would never trade currencies because it is too high risk.” That’s what I’ve read and heard from many individuals all across the Internet. I’ve also heard people say currency trading is nothing more than gambling or that the entire Foreign Exchange Market is a scam and that the currency market is nothing but a monster out to steal your hard earned money. That is pure nonsense.
Currency trading does not have to be high risk. Yes, it can be high risk, but how is that different from trading stocks, drinking alcohol, driving a car or riding a motorcycle, swimming in deep water, playing sports or cooking? All those activities can be high risk but usually aren’t. Why is that?
It’s because the risk is usually very well managed and or circumvented to the point where that activity isn’t significantly risky at all, but of low risk. Risk can be very well managed or completely circumvented by receiving education, real world experience and being conservative. That means currency trading can also be low risk as well. If a currency trader is well educated, has gained real world experience and is conservative with one’s funds, the risk will be significantly lowered. But what is risk?
Risk and What it Means
Risk is simply the probability, likelihood or chance of loss or a negative result. In currency trading, risk is the probability, likelihood or chance of the loss of principle capital (your money) in your brokerage account. The higher the risk, the greater the chance / probability one would lose principle capital, which is a really bad thing. Now that you have a good understanding of what I mean by risk, I now want to talk about how to make currency trading less risky.
How To Make A High Risk Activity, Low Risk
Making currency trading less risky is pretty straight forward. To do so, you must become educated, acquire real world experience and become conservative with the size of your trading positions. That’s it. In fact, becoming sufficiently educated, acquiring sufficient experience and becoming conservative with your funds or just being conservative in general (non financial activities) will aid in drastically reducing risk, not only in other financial markets, but in other activities in life as well.
First is education. Before you do any activity where there is risk, seek a good education on the subject matter. Education is very important and is vital if one wants to perform successfully and mitigate risk. One common misconception is that education is only acquired in a traditional educational institution. No.
Education can be obtained from a book at a library, from a mentor who’s already an expert in the activity you’re trying to participate in, education can be obtained from home study courses like a video or audio series, websites, webinars, ebooks, video tapes, DVDs, Blu-rays, anything. As long as you are learning information about the activity your attempting to master, which in this case is Forex trading, then you are being educated.
Don’t just jump right into trading currencies without learning the the ropes. Doing that will make Forex trading extremely risky. Also, beware of whom you seek an education from. There is tons of misinformation out there. When searching for a mentor or a source for an education, due diligence is a must. To quote a great book, “The Richest Man in Babylon”…
“…advice is free, but make sure the advice is worth having.”
– Algamish from the book “The Richest Man In Babylon”
After you feel that you have been well educated on a subject matter, attempt to get real world experience. In the case of Forex trading I suggest that a new currency trader uses a live Forex trading account and not a demo account. I recommend that you read my article called “Reasons to Never Trade Forex Using a Demo Account“. There I talk in depth as to why I believe 98% currency traders should never use a demo account. To sum it up very briefly, currency traders need real world experience and I argue that demo accounts fail at providing that.
Once you’re educated and you’re working to acquire as much real world experience as you can, one must also become at least moderately conservative with the trading funds. The goal should be to consistently trade profitable over time. Slowly building more and more wealth.
Those who aim to trade large positions relative to their account balance in an attempt to make it rich with one or two trades will increase their risk substantially. So trade in such a way that if you were unprofitable in five to ten trades consecutively, your account balance would still have sufficient funds to continue trading. Hey, if you’re losing that many times consecutively, I would question your education.
Forex Trading Riskiness Depends on Who’s Trading
Let’s recap. To successfully mitigate risk in Forex trading, one must…
- Obtain a comprehensive education in Forex trading.
- Obtain real world experience. (And a lot of it)
- Actively practice being conservative with trading funds.
Forex trading is extraordinarily less risky for those currency traders who acquire an education, real world experience and is conservative with one’s trading funds. Forex trading is extremely more risky for those who has not acquired an education or the right education and or has not obtained sufficient real world experience and or does not practice conservative trading. It’s that simple.