That’s the question that’s in the minds of many of my students. Why is it that forex trading makes such a lot of gains when compared to financial markets as a whole?
For me the answer is simple: Forex trading is like any other investment.
The real question is why?
You can easily find reasons why any investment made, and forex trading in particular is a great way of making money.
What are the main factors that make forex trading a good investment?
Let’s take a look.
High return and risk
Forex trading is highly specialized. This fact is reflected by the fact that we see few trades being made on a daily basis.
Moreover, with the increasing amount of currency that we see traded each day, it is very likely that every trader faces a very short time period for executing a single trade.
The best traders are able to quickly pick up these trades and make good gains in the short-term. Then, once profits are announced, the remaining time is usually lost to the market as a whole.
On the other hand, most of us who are not as skilled as the skilled traders make daily and hourly trades. Hence, when it comes to the daily risk of our daily trading, we will probably lose out.
That’s an excellent outcome to achieve, right?
Why is it so costly to buy forex?
It is because, even in the case that the profit is large, there is a high risk. If the stock market crashes, your investments lose value and this loss is immediately compounded. The more often you trade and the better you are, the greater the loss and the larger its compounded effect.
This makes it a highly risky move to make. It is better for us to go for a lower priced option for a shorter period in order to build up our stocks.
The risk is also caused by the fact that forex trading doesn’t actually do much in the realm of hedging. It is mostly used to speculate on asset movements and in extreme cases, you can even use other assets to hedge your position.
On the other hand, when we trade, we are simply making trades. If we are not confident that the asset/service/company I’ve chosen will remain a constant price or not, then we will probably just stay on our original choice.
In the long run, we gain and we lose the same amount,
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