Forex is the easiest market for new traders, right?
December 2, 2008
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John Forman - The Essentials of Trading author
Here’s an interesting question on the forex market asked by a reader named Rod. It’s one I’m sure a lot of new traders probably have.
Would it be fair to suggest that the forex market, or at least the way forex brokers allow people to trade, is easier for the novice than trading futures contracts or mini contracts (eg. commodities, equity indexes, fixed income and so on) because of lower costs and better leverage?
By “easier” I mean having better chances of profitability with the systems they develop.
The first thing I would say in response to Rod’s inquiry is that I love to use forex when I teach trading. It was a big part of my book, The Essentials of Trading, and I used in the classroom when teaching college students about trading. Now, having said that, there were a couple of major reasons why I chose forex for teaching purposes. One was that it’s a 24-hour market, which meant I could have the students actually “trade” a moving market during evening class hours, which would be harder with other markets. Second, Oanda has an unlimited length demo, so students could use it through a full term (and beyond), rather than getting cut off after a month.
Now, as for whether forex is the best market for a new trader, I’m hesitant to agree.
The bottom line is that the best market for a new trader is the one in which they feel the most comfortable and confident based on their risk tolerance, interests, and style.
Are the costs to forex trading low relative to others? They could be. To really make a meaningful judgement on that one needs to compare the total cost of doing comparably sized trades. That means commissions and bid/ask spreads (and yes, stocks and futures have them!), and anything else that might go into the cost of doing trades. This is going to be especially important for active traders, but less so for longer-term ones.
In terms of better leverage, it’s definitely true that forex trading offers the opportunity to really lever up. Is that really a good thing for a new trader, though? New traders do silly things, like trade too big. Lots of leverage just tends to amplify the inevitable errors new traders make. I’m not inclined to think of that as being a good thing.
Also, leverage and margin is something which a great many people struggle with when they get started. Add in the fact that forex is about relationships vs. the value of assets, and they way forex positions can get complicated when combined, and you get a market that isn’t the easiest for new traders to grasp. It’s certainly not for everyone.
In terms of trading style, fundamentally oriented traders are definitely going to feel more comfortable with stocks (and perhaps other markets) than forex. Also, given the additional data (like volume) available to equity traders (and to a lesser degree futures), some are going to find technical analysis of forex less easy than is the case in other markets.
That all said, the fact that one can trade very small positions definitely opens forex up to a much wider audience than other markets where there are higher barriers to entry. And of course there is a broader opportunity to trade short-term given the real 24-hour nature of forex.
To bring it all together, I think stocks are conceptually much easier for most folks to trade, at least as newbies. They are pretty easy to understand, where forex can sometimes make one’s head spin in the early days of learning about trading and the markets. I’m not going to say new traders shouldn’t trade forex, but I’m also not prepared to call forex the easier market to trade for a newbie either.
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