JohnsMoneyTree
Active Member
Forex traders are a special bunch, especially new traders. We often get caught up in technical indicators, trend spotting, candlestick pattern analysis and news events. To be successful, we often think, means being aware of every financial news source and chart all the time!
After a few months of this, people start burning out and swear off trading the Forex completely. Those of us who stick it out either learned that we don't need to micro-manage every trade (unless we're scalping of course) and we often go to larger time frames such as H1 or H4 from the M5 that we may have started with.
But diversification is something that we don't always consider outside of our trades. If you ask a Forex trader about their diversification strategy you'll often get a response like: "Diversify? Sure, I trade EUR/USD, GBP/USD and USD/JPY! I diversify across three currency pairs!" That's not quite what I meant.
When you trade, do you set a stop loss for every order? I expect the majority of you do. Forex trading is definitely a high risk form of investing and we often set stop losses to protect ourselves from wiping out our accounts. Yet when I hear of traders solely focused on Forex trading for the financial future I have to ask why? Being successful in Forex trading is great, but the returns can be highly variable. What do you do with your Forex trading profits? Store them in a mattress, bury them in a mutual fund? Buy and sell stocks on the side?
We know that the majority of people who try their hand at Forex trading lose their initial investment and then swear off trading completely. For those that remain, very few people make it to the point that they quit their jobs and try to live off of Forex trading completely as their sole source of income. For the majority of day traders, it is easy to get blinded by the allure of Forex trading. The hope is that you can "strike it rich", be one of the "super elite" and quit your day job to trade Forex full time. Unfortunately reality doesn't always meet our dreams, but we still chase them without paying attention to the risks. Just like setting a stop loss for your Forex orders, why not set a stop loss for your investments?
The phrase "putting all your eggs into one basket" is usually thrown around when people start talking about diversification, but nobody ever really defines what the "eggs" and "basket" are! I think everyone can agree that the "eggs" are money, but the "basket" is where things get fuzzy. When a Forex trader says that they trade a handful of pairs and that's how they diversify, well, they still have all their money tied up in a high risk investment, namely Forex trading! Likewise for stock traders who trade a variety of different sectors, they are still trading stocks which is also a high risk investment!
The whole point of diversification is to make sure you protect as much of your investment capital as possible. You don't want to have everything (or the majority) of your investments tied up in one type of investment. You want a balance of liquidity, security, growth and (whenever possible) protections against substantial loss. You also want a decent ROI, but that goes without saying.
I personally trade the Forex and have it account for about 35% of my overall investment portfolio. I love the Forex and the excitement that surrounds it. It's unlike any other investment option out there, with great potential for both gains and losses. At the same time I love my family and know that not only do I want to continue to provide for them now but also for the long term future. The markets are fickle and there's always risk when trading the Forex, so I choose to diversify in other options like bonds, stocks and even a little cash that grows at a glacial pace.
Just remember there's more out there than just Forex, even if she is a seductive temptress.
I'm the author of "Growing The Money Tree", a book aimed at new Forex traders, people seeking financial independence and those curious as to why I want to work as a Barista at my local Starbucks. For more on my ramblings, check out my blog at http://www.growingthemoneytree.com/blog/.
After a few months of this, people start burning out and swear off trading the Forex completely. Those of us who stick it out either learned that we don't need to micro-manage every trade (unless we're scalping of course) and we often go to larger time frames such as H1 or H4 from the M5 that we may have started with.
But diversification is something that we don't always consider outside of our trades. If you ask a Forex trader about their diversification strategy you'll often get a response like: "Diversify? Sure, I trade EUR/USD, GBP/USD and USD/JPY! I diversify across three currency pairs!" That's not quite what I meant.
When you trade, do you set a stop loss for every order? I expect the majority of you do. Forex trading is definitely a high risk form of investing and we often set stop losses to protect ourselves from wiping out our accounts. Yet when I hear of traders solely focused on Forex trading for the financial future I have to ask why? Being successful in Forex trading is great, but the returns can be highly variable. What do you do with your Forex trading profits? Store them in a mattress, bury them in a mutual fund? Buy and sell stocks on the side?
We know that the majority of people who try their hand at Forex trading lose their initial investment and then swear off trading completely. For those that remain, very few people make it to the point that they quit their jobs and try to live off of Forex trading completely as their sole source of income. For the majority of day traders, it is easy to get blinded by the allure of Forex trading. The hope is that you can "strike it rich", be one of the "super elite" and quit your day job to trade Forex full time. Unfortunately reality doesn't always meet our dreams, but we still chase them without paying attention to the risks. Just like setting a stop loss for your Forex orders, why not set a stop loss for your investments?
The phrase "putting all your eggs into one basket" is usually thrown around when people start talking about diversification, but nobody ever really defines what the "eggs" and "basket" are! I think everyone can agree that the "eggs" are money, but the "basket" is where things get fuzzy. When a Forex trader says that they trade a handful of pairs and that's how they diversify, well, they still have all their money tied up in a high risk investment, namely Forex trading! Likewise for stock traders who trade a variety of different sectors, they are still trading stocks which is also a high risk investment!
The whole point of diversification is to make sure you protect as much of your investment capital as possible. You don't want to have everything (or the majority) of your investments tied up in one type of investment. You want a balance of liquidity, security, growth and (whenever possible) protections against substantial loss. You also want a decent ROI, but that goes without saying.
I personally trade the Forex and have it account for about 35% of my overall investment portfolio. I love the Forex and the excitement that surrounds it. It's unlike any other investment option out there, with great potential for both gains and losses. At the same time I love my family and know that not only do I want to continue to provide for them now but also for the long term future. The markets are fickle and there's always risk when trading the Forex, so I choose to diversify in other options like bonds, stocks and even a little cash that grows at a glacial pace.
Just remember there's more out there than just Forex, even if she is a seductive temptress.
I'm the author of "Growing The Money Tree", a book aimed at new Forex traders, people seeking financial independence and those curious as to why I want to work as a Barista at my local Starbucks. For more on my ramblings, check out my blog at http://www.growingthemoneytree.com/blog/.
