Trading In Currencies Is a Bad Idea and Not For The Beginner Investor

by Hank Coleman

When commodities like gold and currencies such as the euro see incredible short term gains, fair-weather investors pile into them like no one’s business.  And, a recession has added fuel to the fire and exacerbated the problem.  Everyone is looking for quick money to replace the losses in their investment portfolios and retirement accounts.  But, buying and selling currencies such as the dollar, euro, pound, or yen is not for the beginning investor.  It is actually not even recommended for the intermediate investor either for that matter.

trading-currencyDollar Is A Vehicle.  The dollar is a vehicle, not an asset.  Okay, that is not quite true…sort of.  The dollar in and of itself is not an asset alone.  The account that the dollar sits in or the share of stock or mutual fund are the true assets.  The dollar is a vehicle that lets you buy shares in assets like shares of a company’s stock or in a mutual fund.

You Need Volume.  You need to trade in a large amount of currency contracts to make it worth your while.  Currency moves in penny increments, and investors make money by trading on those pennies.  Most transactions actually tend to focus on the difference between bid and ask prices equal to three tenths of a penny ($0.003) on most transactions.  In order to make any amount of significant money, you have to trade a large value of currency contracts.

It Is Complex.  It is complex to trade in currencies.  It is not as easy as opening an account at your local discount stock broker such as Scottrade.  There are professional currency traders who do nothing but watch currency prices all day, every day.  They understand the macro and micro economic principles that move the different currencies around the world.  They have powerful computer programs that watch for currency arbitrage.  Small investors are at an informational disadvantage before they even start investing. 

Crisis Play Havoc.  The value of the dollar spiked after the terrorist attacks of September 11th and our recent credit crisis because investors piled into bonds for safety.  Buying bonds requires the government to buy the dollar and increases the price of the currency.  It is a common reaction, but the real problem with all of that is that we do not know when the next crisis will hit. 

Slipping Into Day Trading.  People can make money trading currency, but a lot of people find themselves on the wrong side of a trend and suddenly in trouble because they try using day trading types of investment strategies to make money with currencies.  Day trading is making a series of short, small trades in hopes of making a quick profit.  

Foreign currency exchange, also called Forex, has grown in popularity recently as more investors look for a quick way to recoup their portfolio losses.  But, trading in foreign currencies is not for the beginning investor.  It is best left up to the professional money traders and large hedge funds that have a distinct advantage over beginner and intermediate investors.  Like buying gold from late night television, most of the people recommending this investing strategy to the general public are selling something.  Beware!

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