Is forex trading risky? No but highly leveraged get-rich-quick is!

Forex trading is no more risky than investing in stocks or real estate

I wince involuntarily when I hear individuals tell me that ‘forex trading is very risky‘. This statement brings out a strong dissonance because forex trading is a leader in the development of powerful trading platforms that have all kinds of risk control functions as good as those available to other kinds of trading. In addition, the Monetary Authority of Singapore (MAS) has given us one of the most free but best regulated environment in the region for individuals to trade foreign currencies.

So let’s be extremely precise: forex trading has no more or less risk that other forms of investments like stocks or real estate. Who are the culprits then? There are two.


Leverage and his best buddy Get-rich-quick

It is my very strong belief that forex trading got a bad name because it got associated with these two fellows.

What is leverage? In layman terms, leverage is a multiplier that lets individuals trade a large position with a small deposit. In forex trading, the maximum forex leverage available from regulated forex trading brokers is 50 times. An individual can use a $200 deposit called trading margin to trade a $10,000 position.

To a person with the right approach, forex leverage is a boon. It makes forex trading very accessible to individuals especially young people who may not have a lot of trading capital. Perhaps this levels the playing field because forex trading is to those with little trading capital as stocks and real estate are to those with more.

To the wrong person however, having a lot of forex leverage is a disaster. But the blame should not be pinned on forex trading. Just imagine if 50 times leverage was available to a stock investor. Or a property investor. Imagine: you have a home that you already own. You monetize the value of your home and use the cash to make down payment to purchase 50 new houses. Is property the new forex?

The dark side of leverage is that it gives individuals a sense of power. ‘Becoming a millionaire in just 1 month‘ suddenly becomes ‘possible’. And very attractive too. Even cautious individuals I know of wonder: why not give that one month millionaire thing a shot. ‘If I fail after 1 month, I’ll just move on.’ With that power to achieve overnight success, the draw to give it a try is too strong for some too refuse. So leverage has a best friend. His name is Get-rich-quick.


Industry is at fault, customers are at fault

Certainly industry bears a lot of responsibility for encouraging that get-rich-quick mentality. There are brokers, trainers in the forex line that use this become millionaire message to recruit customers. It may be morally questionable, but no one has been prosecuted yet and so in their mind ‘let’s continue to do it’. Greed certainly sells. Sales messages that shout ‘make more money‘ or ‘become millionaire now’ defintely excite prospective customers more than ‘it’s risky but good  you must prepare for rainy day’.

Customers must not claim innocence because no one can compel you to part with your money if you don’t want to.


Is forex trading risky? Yes but money can be made too

Industry has to reflect and make changes before the law comes down in order to protect hardworking individuals. But prospective traders and investors must also look inwards at their own motivation. When it comes to quick money, many individuals let that wild side of themselves come out to have a little bit of fun.

Importantly, don’t point fingers at forex trading because there is more good than bad. Handle it carefully and reap its rewards. Because the last I saw, ‘risky’ stocks and real estate investing has not stopped people from making money.

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One thought on “Is forex trading risky? No but highly leveraged get-rich-quick is!”

  1. Soh Tiong Hum says:

    One thing I left out in this article. MAS is already evaluating reducing leverage to 20 times only. See MAS May 2012 consultation paper page 5 point 2.6. –

    “To enhance credit risk management by derivative dealers, and ensure retail investors have sufficient financial buffer to cope with unexpected losses, MAS proposes to:
    (a) Increase, for CMS licensees, the minimum margin requirement for CFDs on FX entered into with retail investors from 2% to 5% of notional transaction value;

    Link here

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