Why is Forex so hard to trade?

With a daily trading volume of $7.5 trillion, the foreign exchange (forex or FX) market is the largest financial marketplace in the world, with approximately $850 million changing hands every second. The high liquidity, round-the-clock schedule, and ease of accessibility of forex trading have made it a popular choice, particularly for traders with a background in finance.

Although banks and other financial institutions used to be the only ones allowed to deal in this enormous market, online trading platforms have allowed individual investors to try their hand at currency trading.

In order to profit from shifts in their relative values, forex traders simultaneously purchase one currency and sell another. For instance, you could buy euros and sell dollars to sell the euros later at a higher price if you believe the euro will appreciate versus the US dollar. Thus, forecasting and making money from these shifts in currency values is the aim of forex trading.

The accessibility of online forex trading accessibility is a double-edged sword. It has given regular traders new opportunities, but it has also made some people risk money that they cannot afford to lose.

Furthermore, newcomers may find the market jargon overwhelming. Some traders may take on more risk than they would in other markets or expect higher investment returns than the market can consistently provide due to factors unique to currency trading.

Therefore, buying stocks or commodities is not the same as trading on the foreign exchange market and it is commonly believed that forex is hard to trade, especially for beginners. Let’s examine the reasons why.

Forex trading: Challenges & risks

Complex price determination: Global politics and economics are the main factors influencing forex rates, and it can be challenging to evaluate data and derive trustworthy trading conclusions. Technical indicators, which are the main cause of volatility, are used in the majority of forex trades.

Risks involved: Forex trading enables traders to control a larger position with leverage, which has the potential to magnify profits as well as losses.

Autonomous learning: A trader can get expert help in the stock market from relationship managers, trade advisors, and portfolio managers. Forex traders have little to no assistance and are most of the times on their own. Throughout the trading career, self-directed learning must be disciplined and ongoing. Beginners may give up during the first phase, mostly as a result of losses brought on by inadequate knowledge of forex trading and bad investing practices. Nowadays however, there are many educational materials, webinars, blog articles and more to assist forex traders in their journey.

Significant volatility: In the extremely volatile forex market, one can easily sustain significant losses if they have no control over macroeconomic and geopolitical developments.

Things that make trading forex hard

Maintaining discipline

To be a successful forex trader, one must experience numerous small losses in addition to a few large gains.

A trader’s patience and confidence may be put to the test when they suffer numerous losses in a row. It is usually very hard to prevent emotions from influencing trading choices.

Investing within a well-thought-out trading plan that supports trading discipline is the key to conquering emotion.

Sticking to a forex trading plan

Developing and adhering to a trading plan is the first step towards success, regardless of whether one trades forex or any other asset class. The saying “Failing to plan is planning to fail” applies to all forms of trading.

The successful trader follows a written plan that outlines the expected return on investment (ROI) and contains risk management guidelines.

Traders who follow a strategic trading plan can avoid some of the most common trading mistakes; without a plan, you’re minimizing your potential in the forex market.

Adapting to the forex market

One needs to plan every trade before the market even opens. The risk of suffering sizable, unforeseen losses can be considerably decreased by performing scenario analysis and organising the moves and countermoves for each possible market scenario.

There are new risks and opportunities as the market shifts. Successful traders adjust their strategies to reflect shifts in the market.

They rarely get caught off guard when low probability events happen because they are prepared for them.

Also, they remain ahead of the competition and consistently discover fresh and innovative methods to capitalise on the changing market through a process of education and adaptation.

Managing risk

Traders should prioritise risk management just as much as strategy development. Some individuals will trade without security and refrain from employing stop losses and other similar strategies out of concern that they will be stopped too soon.

Successful traders are aware of the precise percentage of their investment capital that is at risk at any given time and are confident that it is reasonable given the anticipated returns.

The larger the trading account, the more crucial it is to preserve capital. Diversification across trading strategies, currency pairs, and appropriate position sizing can shield a trading account from irreversible losses.

About leverage

All kinds of traders and investors can make these mistakes, but problems with the forex market itself can make trading much riskier. The substantial financial leverage available to forex traders adds to the risks that need to be controlled.

Leverage gives traders the chance to increase profits. Leverage and the associated financial risk, however, are a double-edged sword that increase potential losses as much as they increase potential gains.

The forex market gives traders the ability to leverage their accounts, which in certain situations can result in enormous trading gains and in other situations, significant losses.

Although traders can use huge amounts of financial risk on the market, it is usually best for them to use as little leverage as possible.

Many forex traders fail because their capital is insufficient for the size of their trades. Forex traders are forced to take on such a big financial risk due to either greed or the possibility of controlling enormous sums of money with a relatively small amount of capital.

It is clear that the incapacity to tolerate sporadic losses and the impact of those sporadic losses through high leverage levels are what makes forex hard, even though the forex market is anticipated to be less volatile over the long run than the equity market.

These problems are made worse by the high degree of macroeconomic and political risk present in the forex market, which can lead to short-term pricing inefficiencies and severely affect the value of particular currency pairs.

Final thoughts

Anyone with a laptop or smartphone can potentially make money in the forex market because of the low entry requirements and round-the-clock trading hours. But there is a high risk and high leverage associated with those opportunities.

Despite what some people may say, trading forex is not a way to profit fast. It takes a marathon to become proficient enough to generate profits. To succeed, one must consistently work to become proficient in the necessary strategies.

Furthermore, tracking prices and volatility is challenging in round-the-clock markets. The best strategy is to trade forex methodically using a well-thought-out plan and to maintain stringent stop losses for all trades.

Losses can occur rapidly because forex traders have easy access to leverage. Strong emotional control, an effective capital allocation plan, a thorough understanding of leverage, and the readiness to limit losses are all necessary for traders.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.