Is Forex Trading Right for You?

Forex trading is the new day trading. Those who flocked to the Internet in the 90's with dreams a making millions playing the stock market have moved on to trading foreign currency. Sure, day trading still has a solid following, but it's no longer the new new thing. The novelty has worn off, and now it's hard to go anywhere on the Web without stumbling over Forex training, monitoring software, and other paraphernalia.

The basic idea behind Forex (foreign-exchange) trading is to take advantage of the changes in relative value of two currencies. For example, if you move from 1400 US dollars to euros when the exchange rate is 1.40 (getting 1000 euros), and move back when the rate is 1.50, you've turned your $1400 (US) to $1500 (US). Of course there are fees and commissions, but the opportunities for quick profits are there.

On an average day, 4 trillion (yes, that's trillion) US dollars worth of currency changes hands on the Forex market. Compared to that, a day's work in the stock markets, seems paltry--a mere 300 billion US dollars worth of trades. Forex trades are usually executed between familiar currencies like US Dollars, Japanese Yen, British Pounds, and Euros, but you can also trade in more exotic currencies like Israeli Shekels, Saudi Arabia Riyals, and Thai Baht. Somewhere in the world there is always a trade going on, and money to be made, and it's being made at lightning speed.

And lost just as quickly. Although the well is not as deep as when selling stocks short (in which you can lose far more than your initial investment), it is quite easy to watch your entire investment evaporate with sickening speed. The pace of Forex is part of its appeal, but to survive you need to be a certain sort of person with a certain sort of training.

So, do you have what it takes? Here are 5 things to ask yourself:

1. Do you enjoy world history and staying current on events around the globe?

When you trade stocks, it's usually enough to have an understanding of the company, the industry, and the economic factors that affect that industry.
But when you're trading money, you need to understand everything. It's not just a piece of the financial picture you're looking at; money affects and is affected by every aspect of the economy, domestic and global. It is affected by historical alliances and conflicts as well as day-to-day events.

For an international news junkie who finds macroeconomics and history fascinating, Forex trading is an opportunity to put their hobbies to good use. But if you're not one of these people, you may soon be overwhelmed by the amount of information you need to sort through, and bored out of your skull.

2. Can you make a decision and carry it out without hesitation?

The Forex market moves quickly, there is a lot of information to track, and the difference between a successful and failed trade can be a matter of pennies. You have to be able to make decisions quickly and carry them out with confidence in a matter of seconds. If you're the sort of person who likes to sleep on a decision, Forex is most definitely not for you.

3. Can you keep your finger off the trigger when you need to?

The flip side of #2 is that it's easy to get nervous and make a trade before you have enough information to do it with confidence. This is just as dangerous as hesitating. The best Forex trader is like an ER room doc, staying calm and thinking clearly while gathering information, then moving forward with assurance and precision.

4. Do you enjoy keeping odd hours?

Because the most popular Forex trading currencies are scattered across the globe, you may find yourself making a trade that depends on events during the business day in a time zone 10 hours away. If you're the sort who nods off every night watching the late news, you won't enjoy Forex. If you can wake up at 3 am alert and ready to make crucial decisions, and then head back to bed for a couple hours sleep before work, you're perfect for Forex.

5. Can you resist the downward spiral?

Trading Forex is like riding a motorcycle. It's not a question of if you will crash, but when, and how you'll handle it. You will have losing days in the Forex market. That's not failure. Failure is letting those losses make you stupid. On a bad day, can you close out your positions, do whatever helps you blow off steam, then sit down and analyze what went wrong, honestly and thoroughly? Can you resist beating yourself up for odd market swings that no one saw coming, while not letting yourself off the hook for your bad calls? Can you calmly make a plan to learn and do better next time? If not, Forex could well be a financial disaster zone for you.

If you've read this far and think you've got what it takes to be successful in Forex, your next step is to set up a practice account and start studying. Stay tuned for further installments, in which we'll examine beginning strategies and introduce some basic concepts and theories that are central to Forex trading.