Lose Your Investing Mindset with Forex Trading

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In a recent communication with someone interested in purchasing a Netpicks trading strategy and joining the very successful live trade room, he mentioned a term that I wanted to address. My initial response to the term in our email exchange was shorter (there was much to cover) so I wanted to take the time to expand on it further.

The term is “Investing".

Many people that enter Forex trading also have experience trading stocks. For the complete trading newbie, they have mostly been exposed to stock terminology via news broadcasts and other media and therefore use the term investing with all interactions with the markets. In stocks, many people hold individual or a basket of stocks for a certain period of time usually running into months and sometimes years. As a matter of fact, if you day trade stocks, depending on amount of round turn trades, you will be classified as a Pattern Day Trader and other rules, including account minimums come into play. In Forex, that designation and the accompanying rules do not exist.

“Investing" in Forex is an entirely different beast than investing in stocks. For one thing, there are over 2000 listings on the NYSE giving someone who wants to invest, ample choices in where to place their funds. In Forex, there is barely a fraction of choices available. Yes, there are many countries with different currencies such as the Iraqi Dinar, North Korean Won and the Polish Zloty but to use them for investing sake would be something many individuals would not even consider. To buy, someone has to sell and frankly, currencies such as those are far from being considered liquid. To find them with a strong trend is remote. Stocks on the other hand have so many choices, it is much easier and probable you will find a strong trending stock.

When you enter the Forex trading arena, you really need to change your perspective. Even long time stock traders and investors need to think about things on a different level than they are used to. Failing to retool their thought process can hurt them financially.

What is a long term stock trader looking for in a particular stock? According to Warren Buffett, he looks for a company that is undervalued and is due for growth. His approach to Forex may be finding a country that is overvalued and expecting a decline in the currency value. Applying the same level of research to Forex as he did with stock may lead many to believe he would rake in the pips. In 2005, betting the U.S. dollar would weaken, cost Mr. Buffett $1.23 billion.

You certainly can latch onto a currency that is experiencing growth due to a strong economy which usually leads to higher interest rates. For the big money players, they have the funds and connections available to take advantage of these opportunities in virtually any currency they see fit. To them, low liquidity can be not as vital and spread costs, something which retail traders must watch, are not as important to the big money especially due to their non-reliance on high leverage.

Retail traders usually focus on pairs that are liquid and have spread costs in the 1-2 pip range. The “major pairs" are where most retail traders trade and the EURUSD being the most popular pair. Focusing on the majors really limits your exposure to finding long term “investing" types of trades compared to what stocks can offer. Yes, the big moves do happen but when you are only focusing on the majors, do not expect to place 100's of long term trades a year. It just isn't going to happen.

For stocks, growth is a good thing for a company. For an economy, growth is generally good but for a currency traders, too much of a good thing usually causes it to end. A current example is here in Canada. Compared to America and other parts of the globe, our economy did very well during the financial crisis that rocked the world. If you bought the CAD, you did very well as it did nothing but climb against the USD. Problem is, the exporters of this country are feeling the pain. As the trend was strong, many players jumped on board to ride it giving the CAD even more juice. Now, hovering around par with the USD, the economic growth of Canada can start to feel some pain. The export of oil from Alberta helped drive the CAD to high levels which caused about a 20% drop in manufacturing and causing almost ½ million in job losses. There were trade-offs of course with the resource sector growing but that is a fraction of the size of the manufacturing sector. There will come a time when the government does something to stop the rise of the CAD to basically save the economy of the country. The Bank of Japan is notorious for attempting to put the brakes on a strong currency through intervention. Many current Forex traders in North America can no doubt remember heading to their charts around 7:00 P.M New York time and being met with a huge bar or candle on their charts. The effects of intervention are usually short live though with many countries preferring to manipulate interest rates to control growth.

That story points directly to the fact that growth is good but too much growth will put an end to the trend. Long term trends get in the cross hairs of governments and be assured they will take action that if you are not ready or aware of, your trade will be in serious trouble. Stocks usually don't have to content with intervention or interest rate manipulation by governments and are, in comparison, a safer bet for investing.
Forex traders, in general, would be well advised to focus on short term trades which also include swing trading. Find a suitable entry point according to your plan, take a decent profit and pull yourself from the market. Lose the investing mindset when it comes to Forex and you may never find yourself sideswiped by a trend that gets stopped dead in its tracks taking your profit with it.

- Shane Daly: Forex Expert Extraordinaire from the Great White North

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