Is Currency Trading Worth the Risk?

There is a Wall Street Journal article entitled “Is Currency Trading Worth the Risk?

Is Currency Trading Worth the Risk?

I will analyze the article for you and provide my trader and order flow analysis.

 Account Blown Up Three Times

An unfortunate trader names Michael Bolduc has wiped out his account a whopping three times.  The WSJ immediately calls the foreign exchange market ” high-risk, high-reward.”

Well, for some traders, the forex market can be high risk, high reward.  Yet for others, the forex market’s risk can actually be managed, and the volatility of the market harnessed to generate profits.

The choice almost always invariably is the traders, not the market.

Risky vs Managed Risk

For example if a trader chooses the risky approach they are probably:

• Using too much leverage / Risking too much per trade.
• Not using stop losses effectively
• Not analyzing the market correctly

Blowing not one, but three trading accounts usually means that the trader is doing major things wrong.  If you use too high leverage, then small fluctuations in the price can represent large portions of your equity.  If you swing for the fences on every trade, and couple that with poor market analysis and start to take losses of 10-25% per trade, then I can see how you blow up three trading accounts.  The trader may or may not have been using stop losses.  Even if you use stop losses, if you decide to use a large amount of leverage, and are wrong on the trade and it hits your stop losses, you will take big losses.

There are other potential horror scenarios about blowing your account if the market gaps over your stop loss level and you get slipped massively on the position.  But this should not happen often with proper market analysis, and it should definitely not lead to three blown trading accounts.

I have never blown a trading account.  I suffered losses of around 30% with my first trading account, but that was when I was stuck in the technical indicator and price action trader cycles.  Luckily I was only risking 1-2% of my account per trade, so I was able to stay in the game long enough to learn the ropes.

With order flow trading it was all uphill after that.

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 Managed Risk

• Keep Leverage Manageable
• Use Stop Losses effectively
• Strongest Possible Order Flow Analysis

Forex trading does not need to be risky.  If you keep your leverage used low and position size accordingly, then the market fluctuations will only represent a small portion of account equity.  Yes, profits will be smaller, but your losses will be smaller as well.  Taking a loss becomes easier as it is a smaller portion of your account.  Having the order flow and liquidity on your side is also very helpful as well.

Michael Bolduc, from the article states that he has been attempting to trade since 2003.  He likes the free charting and getting up and running quickly.  I like the free charting as well and getting up and running quickly, if I can identify the strongest possible order flow trade.

He says that “There seems to be so much money that can be made.”

On that, he is correct.  There is a lot of money to be made.  But if you do not manage risk appropriately, you will not survive long enough to understand the game. You will not be able to survive long enough to find out how to place the best possible trades.

Mr. Bolduc has been attempting to trade since 2003.  I just hope he discovers order flow trading and learns to manage risk so that he can turn his trading around.

Difficult To Manage Risk?

The article then proceeds to state that “Forex’s frenetic pace can be brutal to rookies and sophisticates alike. Managing proper trade sizes and rapid price movements—all while using “leverage,” or borrowed money, to amp up bets—can be devilishly difficult; one bad trade can blow up an entire account.”

It is not hard to manage risk.  Forex can be frenetic at times.  But you always have the option of sitting on the sidelines until the right moment presents itself.  If you are scared of the market volatility you can take the week off, come back next week and see if the markets have calmed down.

Managing proper trade size is easy.  Just use a forex position sizing calculator.  Plug in the numbers and you get your position size.

One bad trade will not blow up an entire account if you use little to no leverage.  Many of the large hedge funds use very little leverage.  Many of them do not use leverage at all.

Forex For Diversification?

The WSJ article then moves to talk about forex being an opportunity for you to “diversify.”

What a load of bull.  Forex isn’t another instrument to “diversify.”  Forex just offers another financial instrument that can move up and down, sometimes substantially.  It is just another financial instrument involved in the global money flow.

The traders who make the most money don’t use forex for diversification purposes.

Someone once said:

The greatest forex trades in the world were not placed following the “diversification” principles that the mediocre media want to hammer into your head.  The greatest trades were placed using global macro analysis.  When Soros broke the Bank of England, he didn’t give a damn about diversification.  He knew that a global macro move was going to occur and piled in with billions of dollars.

Forex Used To Be Even Riskier?

The article then talks about how forex trading used to be even riskier as leverage used to be 100:1, with now leverage being cut to 50:1.  Well, for the traders who used 100:1 leverage, then that was far riskier than using 50:1 leverage.  But who uses max leverage anyways?  Using max leverage will automatically issue you a margin call and forced liquidation of your positions as you are instantly down the spread and drop below the required margin.

For the traders who managed risk effectively and never used nowhere near 100:1 leverage, then that change was meaningless to them.  It didn’t reduce risk for those traders, because they have the self discipline to never even consider leveraging up that much.

It is like a person who makes $40,000 per year, with their credit limit being reduced from $1 million down to $500,000.  Does that reduce risk?  Well it depends on the individual.  If the individual was crazy enough to use the full $1 million credit, then yes, for those individuals it will reduce risk.  But using $500,000 in credit on a $40,000 income isn’t exactly safe either.  On the other hand for the individual with self control, who never even considers using anywhere near $20,000 worth of their credit limit, then the risk is the same.  If you never consider, and never use the additional credit/leverage, then who cares if it gets reduced.

Similarly if the pro trader never uses anywhere near 100:1 leverage, and leverage gets cut to 50:1, then they don’t care… because they were never going to use that much anyways.

Personally, I have never used higher than 25:1 leverage (even that was used sparingly).  It can be very difficult to find the trades where you place the ultra small stop losses that extremely high leverage forces you to place.  You don’t want to be placing highly leveraged trades using 5 pip stop losses.  Thats just dumb.  Look for trades with at least 20 pip stop losses.  Of course that rule also depends on the volatility and spread of the currency pair.