Everyone likes to tout the benefits of making an investment in the financial markets, particularly the forex market. You hear about all the positive life-changing stories of people who were able to take a small amount of money and turn it into millions of dollars overnight. However, don’t be so easily fooled by these stories. Such testimonials tend to suffer from what people call “survivorship bias,” where we focus on the one person who survived at the expense of the 999 who didn’t
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While there are legitimate pros to trading in the forex market, there are also downsides that need to be acknowledged before going into it. Some of them are:
1) Extreme volatility
The fact of the matter is that many changes that happen within the forex market are out of your control and for reasons that go beyond the scope of this article. It is very difficult to monitor prices for this very reason––all you can do is sit back and see what happens. Many people are not able to handle this level of volatility versus the slower pace seen in other financial markets.
2) You vs. the pros
The professionals are the ones who have control over where and when an order will get filled, and unfortunately the general lack of regulation in the forex market does not make this any easier. The only way for you to get around this is to rely on brokers that are under strict regulatory watch.
3) High degree of self-learning
Many forex traders quickly learn that they are 100% responsible for educating themselves on the forex market along with developing proper trading strategies. While the stock market may have multiple options for help (portfolio managers, etc.) the forex market offers no such assistance. Undergoing the effort of continual self-education on a daily basis involves a high level of internal drive, discipline and motivation, and not everyone has these qualities, which is yet another reason why the forex market is not right for everybody.
4) Higher risks
Due to the massive leverage that exists within forex trading, you can make a huge profit. What most beginner traders fail to fully acknowledge is that this leverage is a double-edged sword. It can also result in a loss of equal magnitude depending on the trading decision that they make. You cannot know everything going into a trade, and so every decision is a risk. What you can do is improve your ability to manage risk, which involves keeping your emotions under control and setting hard limits for profit losses so that a bad situation does not become worse.
What other downsides have you personally experienced with investing in forex? Share them in the comments below!
Our Rich Dad Education speakers will explain the basics of the Foreign Exchange Market (Forex) where you have the opportunity to trade 24 hours a day, 5 days a week. Explore this dynamic, fast-paced market and discover if you want to make it a part of your investing future.