Forex trading is written about all over the web. The question is should you trade currencies? The objective of this post if to give you my personal perspective.
The reasons I do not trade currency directly for profit are:
- Currency trading is zero-sum – It is a zero-sum game (or slightly negative minus transaction costs and opportunity cost). This is the most important point. You need to meditate what a zero-sum game is before you decide to invest. Think about it read about it, what is zero-sum vs. positive-sum. Who wins in zero-sum investing compared to positive-sum investing?
- Everyone is trading on technicals – There use to be an adage, that is trade currency on technical not fundamentals. This is the mistake that every currency trader made, that is in the old days they tried to buy and sell based on macro movements in the money supply and demand and its relation to other currencies. Well people got the idea and every guy out there swinging is trading on technicals. I am in a quandary if this has not made the market more sensitive to signals and more efficient in terms of technical indicators. Maybe I believe too much in Paredo‘s paradox, that is you have to zig when everyone else zags.
- Investing Disclaimer: I do trade in an informal way because I do business in two worlds, Europe and America. Since I am more on the sidelines of the market, I trade more on fundamentals, by trying to estimate a natural exchange rate between two currencies and look to see where it trades in relation to this. I simply move money rather than trade options or anything with time decay.
The reason you might trade Forex:
- The largest market in the world – Good news about currency trading. The FX market is the largest market in the world. And I do not believe that professional traders can manipulate currency the way they can other assets. It could be done on a country level, like if one day China decided to dump dollars, but professional players have little influence on this market, at least consistently.
- Little guy’s trading tools are equal to the professional – Professional Forex software is not much different from what you, a small trader can buy. Think about Microsoft office, what you use at home is basically what you use at work. The world is different today. You can buy professional trading software as good as any company.
- Professional traders are not different from you – There are no Einstein’s on Wall Street, only leveraged players. Sure you might have a guy who is a winner, for a while, but this could be a statistical anomaly more than connected to his trading ability. You personally by reading trading books and with your intuition have just as good a chance of making a profit like a professional trader. I worked around these guys all my life and they are no rocket scientists. They use leverage so it amplifies their profits. If there was a true secret, it would be out. Maybe with a rare exception, if you show me an FX genius, I would say I am from Missouri ‘ show me’.
The fundamental problem of trading currency today if you are asking yourself “should I trade” is this. Trading currency, whether day trading or long-term investing is a zero-sum game. Equal number of winners and losers. If you do have a trading system and want to leverage the returns, be careful. Everyone out there thinks they are smarter than then next guy. But like you, the next guy thinks he is smarter than you. If you are asking yourself “can I make money trading currency?” Ask yourself how will you beat the problem of it being a zero-sum game? And there is your answer.
I feel much more comfortable in the equity market which has a longer-term style and where you participate in the real growth of the great companies of the world, if you develop your own system you can leverage your system and amplify your returns. These companies are actively managed by dynamic people. Currencies, in contrast, are managed by governments and are zero-sum overall.
If anyone can overcome the fundamental problem of currency trading being a zero-sum game I am open to hearing the other side.