The currency market is one which is known to be the most liquid and at the same time the largest for all the financial markets. But, the percentage of the traders who are successful is quite low. Lacking proper strategy from professionals like the best forex brokers in South Africa and being indiscipline might be reason why you could end up losing. But there are other inherent factors which are unique only to forex markets which might make it a playground that is dangerous to be in.
The following are the factors which makes forex trading to be dangerous:
It is highly unpredictable
The geopolitical developments and the economic data do weaken or strengthen a currency. But having to interpret these factors which are quite fundamental is not an easy thing to do. Economic data that are strong might enable a currency to be weak because of other reasons.
Like the Japanese yen normally has an inverse correlation with the index of Nikkei. Whenever the index of Nikkei goes up, the yen might decline even if the metrics in the economic recently has surpassed that of the estimates of the analysts. Traders that take long positions basing on macroeconomic that are good would have to lose if they utilized tight stop loss orders.
An incident which supports the argument above can be observed in eh life of one of the greatest economist of all times; John Maynard Keynes. He is the one who was responsible for the international monetary fund and the World Bank foundations.
He is a well-known individual for his theory that is path breaking which rubbished the idea of having a free market that would provide full employment automatically. He ventured into the currency trading after the World War I and ensured to pull his friends’ money into it.
With a person of such stature, it was expected that he would perform greatly well and be in a position to identify the big trends that are in the European markets of currencies. But to the disbelief of many, he lost all his entire capital. The trading in currency proved to be an uphill for such an economist that is well known.
Lack of an outlook of consistency
Most of the times, a retail trader might not get a view that is unambiguous of the situation. That might result in judgment that is erroneous. A currency which happens to look weak might be consolidating to be able to go up as macroeconomic factors might be favoring a certain uptrend.
The greenback rise after the crisis of the 2008 finance is an example that is quite excellent in this particular case. It was the US dollar which gained against its G10 rivals immediately the financial crisis broke out.
Most people expected that the value of the greenback will go down. But the opposite did happen as the markets all over the world fell short of the US dollar that was required for daily operations.
The federal reserve of the US based the Lehman Brothers filed for bankruptcy. Several traders together with some financial analyst expected there to be a plunge of the greenback. It is only the trader that had a deep knowledge of the whole banking system that were able to make money or at least ensured that they cushioned themselves. It is not all the retail traders who are in a position to receive information that are crucial.
China is a rival as a power in the global economic
The Yuan of China being included in the reserve currency by the IMF is what has added an extra complexity layer in the forex market. It is hard to guess clearly or to be able to know what happens in China. Because of that, unexpected stock markets, real estates, or the credit corporate crash might end up having a high implication that will affect the entire world and the retail traders are not well equipped to meet such challenges.
High probability of having to lose the entire capital
It is not something that is uncommon seeing the forex brokers who offer a leverage of about 1:500 or more. A trader that doesn’t have an ability of managing risk might end up losing their entire capital through using a leverage which is high. To be able to increase the overall volume of trading, the forex brokers normally give out leverages that are high.
It is what encourages the beginners to be able to select the leverage which is wrong and in the process, lose their money. The presentation which is inadequate of the low requirement margins by the FX brokerage companies does increase further the retail traders’ vulnerability.
Forex is known to cultivate greed
A beginner that uses a leverage of 1:100 might at times realize a profit of 100% in a matter of just minutes. That might make the trader to start having an overconfident, starting to dream about being able to generate returns of 400% to about 500$ every week or even in a day using the leverage that are high. With that, the balance in the account is placed on a high risk of being blown because of greed.
Addiction to the currency trading
The operations of forex markets are on a basis of 24/5 and there are a variety of trading opportunities at any given time. The inflow which is continuous of the economic indicators as well as the geopolitical news that are across the globe are able to ensure that at least there are some pairs of currency which will be trending at any given time.
That might end up encouraging a trader to repeat sell and buy the currency pairs all the time, maintaining various open positions that results in overtrading that is considerable. Growing the losses form judged trading which are poor might end up spurring the traders to star open extra positions. The vicious cycle might cause an addiction to trading that might be ruinous.