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INVEST DIVA'S GUIDE TO MAKING MONEY IN FOREX
How to Profit in the World's Largest Market
By KIANA DANIAL McGraw-Hill Education
Copyright © 2013 McGraw-Hill Education
All rights reserved.
ISBN: 978-0-07-181873-5
CHAPTER 1
Why Women Can Be Great Forex Traders
Women in Japan are pioneers in at-home forex trading. While forex has an image of being risky, Japanese housewives, or the so-called Mrs. Watanabes, have found ways to invest in currencies that have eliminated risk. They have found a balance between their savings and their investment capital, and they manage their risk properly. Is successful trading limited to Japanese women, or is it a gift that has been given to all women around the globe?
First of all, having taught both men and women from different backgrounds, I have discovered that women in general make better investment decisions than men and therefore are better candidates for forex trading. Additionally, the increasing numbers of female traders all around Asia, the Middle East, and Europe give us a green light. Interestingly enough, even male traders admit to this—not to mention the research and university studies that have also backed me up on the reasons why women can be great forex traders:
1. Women Have More Patience
Being patient is one of the keys to success in forex trading, and women in general are more patient. The hardest thing for men to do is to sit and watch the screen when there is no signal. Women, however, can keep their cool. This arises from women's unique talent for multitasking. It's very easy for a woman to wait for the next forex signal (and to avoid missing it!) while doing her manicure, chatting on the phone, cooking, or reading her favorite fashion magazine.
2. Women Admit When They Are Wrong More Quickly and Easily
In general, women have an easier time admitting that they are wrong or that they have made a mistake. For men, "I made a mistake" or "You are right" is a very hard thing to say. Realizing that you are wrong and admitting it is very important in forex trading. If the prices are going against you and you are tempted to move your stop, the possibility of your losing an even larger amount of money gets higher.
3. Women Are More Teachable
Just because they don't have as many ego issues as men, women pay more attention to forex education and are better at following the rules. Following your gut works only 10 percent of the time in forex trading, and, as we will discuss later, women actually even have better "guts" than men. Forex education is absolutely necessary for traders, as are learning about money management, position sizes, how the system works, and the general discipline and trading psychology.
4. Women Don't Have the "Alpha Male Complex"
There is a difference between having pride in your work and wanting to prove that you are the king of the markets. For men, trading is mostly about being better than other men (an alpha male competition). This leads men to take unnecessary risks and to feel extremely bad when they don't make large gains.
Conversely, men get excited when they make some money and, just to prove their majesty, they may enter a huge position without analyzing the markets carefully, just because they think that they have already beaten the markets and they know best. Something interesting to know is that most of the losses in forex trading come after a huge success.
Women, on the other hand, don't get too proud and won't start doubling their trade size. Pride in a trade can easily go against you. While making continuous successful trades for a long period of time is generally not likely in forex trading, women's ability to let go of their pride and let the price hit the stop can prevent a huge loss.
5. Women Are More Risk-Averse
Women are simply more risk-averse than men, which can be another advantage in trading risky markets. According to an article published in the New York Times on March 14, 2010, this has to do with pornography, motherhood, and the caveman brain. Researchers have found that activating the nucleus accumbens—a brain region that is stimulated when you eat delicious food or look at an attractive person—can affect financial risk taking. When young Stanford men were shown pictures of partially clothed men and women kissing, that region of their brains was activated. And when they were then given financial tests, the men became more likely to make high-risk gambles. Women didn't respond much to the same pictures.
According to Alexandra Bernasek, a professor of economics at Colorado State University, before the dawn of history, aggressive risk taking might have given men an advantage in finding mates, while women might have become more risk-averse to protect their offspring.
6. Women Invest Better in General
A study of 100,000 portfolios showed that women's investment returns outperform men's, 18 percent to 11 percent. This could be because women are typically more cautious with their investment decisions and think longer term. According to a new study, during the financial crisis, men were more likely to sell stocks at the bottom of the market than women were, based on IRA account activity in 2008–2009 at Vanguard, the mutual fund company. This happens for the same reason that men have to ask women out on dates and never stop to ask for directions (and other universal truths about men and women).
"There's been a lot of academic research suggesting that men think they know what they're doing, even when they really don't know what they're doing," says John Ameriks, head of Vanguard Investment Counseling and Research and a coauthor of the study. Women, on the other hand, appear more likely to acknowledge when they don't know something—like the direction of the stock market or of the price of a stock or a bond.
CHAPTER 2
What Is Forex?
Have you ever traveled to a foreign country? If you have, you probably had to find a currency exchange counter at the airport, and you probably noticed a screen with a lot of numbers and strange-looking currency names that you may never have heard of.
You give the nice lady at the counter $100, and you receive a 10,000-yen bill in return. Ten thousand yen! You now probably get all excited and think to yourself, "I'm rich!! I can easily become a millionaire in Japan!"
You may even post a photo of you and your 10,000-yen bill on your Facebook page.
Of course, this excitement dies down quickly when you take a cab to your hotel and all of a sudden half of your money is gone. But the bottom line is that by doing this, you have essentially participated in the forex market! You didn't see that coming, did you?
Forex is actually a combination of the words foreign and exchange (see Figure 2-1).
So it's perfect for wannabe foreigners or for foreigners in general.
It has nothing to do with your "ex," and you are not doing anything special "for" him if you trade forex. Trading forex simply means exchanging one currency for another.
Now, going back to your imaginary visit to Japan, if you have any money left in your pocket after spending some time in Tokyo (which I would doubt, because Tokyo is brutally expensive!), you will go back to the currency exchange counter and notice that the rates have changed.
Let's take an extreme example of a rate change, and say that the rates changed from 100 to 80 in a mere two weeks (see Figure 2-2).
This means that for every 10,000 yen you exchange, you will now get $125, and that means that you have made $25 on those yen during your time in Japan, without doing anything special and just by giving the currency market some time. It's that easy.
But don't get too excited yet. These changes in the currency markets sometimes allow you to make money, but other times they "allow" you to lose money; just as in any other kind of investing and trading.
Are you still thinking about what the differences are between forex and stocks? This is an indicator that you should keep on reading this book.
CHAPTER 3
Top Advantages of Trading Forex Versus Trading Stocks
When I bring up the topic of online trading, the first thing that comes to the minds of many people is trading stocks. While the fluctuations of the two markets can be interconnected, and following the movements of these markets and analyzing the charts share a massive amount of similar techniques, the forex market has a number of solid advantages over the stock market.
The Forex Market Is Open 24 Hours a Day, Nonstop
Yes, you can trade when you're having a sleepless night, or during your coffee breaks on your mobile phone. You can discuss the market with your family and friends in the evening and place orders at the same time. You can even trade while you are waiting for your children to get out of school.
While stock trading allows you to trade only when the stock markets are open, the forex market does not stop at four o'clock. It's a nonstop 24-hour market, starting on Sunday at 5 p.m. in New York and closing five days later on Friday at 4 p.m. And of course, with today's technology, it is available on your iPad and your mobile devices.
Why does it start on Sunday night in New York, you ask? Because that is when the Sydney and Singapore markets open. That's their Monday morning. Then you can trade around the clock and basically follow the market openings in Tokyo, London, Europe, and other places.
The Forex Market Is the Largest and Most Liquid Financial Market in the World
Are you ready to hear this? The foreign exchange market is on average 53 times bigger than any stock exchange (see Figure 3-1).
But the tiny little stock markets such as NYSE Euronext are the markets that people are making all that noise about every day on Bloomberg and MSNBC, which makes nonfinancial-savvy people like you and me want to switch the channel as soon as we accidently get there.
The liquidity of the forex market is about $4 trillion every day, around the globe. What is liquidity, you ask? It is the degree to which an asset can be bought or sold without affecting its price.
The secret to the huge size and liquidity of the forex market is that this huge amount of liquidity includes the entire global currency exchange market. You can make money trading a foreign country's currency without having to leave your apartment. Talk about the global village! It also means that you can get in and out of trades of almost any size at almost any time. This market is deep, baby!
There Are Only a Few Major Currencies Compared to Thousands of Stocks
There are only seven major currency pairs that you can follow nonstop, whereas there are thousands of stocks listed on the New York Stock Exchange or Nasdaq alone. How are you going to decide which stock to follow?
I mean, come on. It's practically impossible to follow all the thousands of stocks listed on the NYSE and Nasdaq and decide which is the best stock to invest in.
Equal Opportunity for Bears and Bulls
Have you heard of equal opportunity employers? The forex market is something like that. It's an equal opportunity market for both bears and bulls.
Bulls are investors who make money when they expect the stock markets to go up. Bears are considered pessimistic investors; if they don't get out of the markets in time when stocks are going up, they are going to lose money. Instead, they make money when they expect the markets to go down, which can lead to getting bullied by the bulls, because it is considered "un-cool."
Bears and bulls basically fight every day in the stock market to see which one wins during the trading day. If you have ever traveled to New York or have watched the movie Hitch, Inside Man, or Arthur, you may be familiar with the Wall Street Bull, the bronze sculpture of a bull that stands at the heart of the financial district in downtown New York.
The statue of the bull speaks for itself. On Wall Street, stock traders favor only the bulls. There is a great deal of discrimination against bears.
But the forex market is fair; the bears can also be the winners! That's because in the forex market, trading opportunities exist regardless of which way the market moves. You will be the ultimate champion whether you make money by being a bull or bear. Whether you are short or long, you still have equal potential for profit and risk. To sum it up, there is no shame in short selling. (By the way, for those of you who don't know what the terms short and long mean in trading, please be patient until you get to Chapter 8.)
Get a Bigger Fish with a Smaller Bait
You gotta love this one, especially if you are a savvy person. In the forex market, you can "get a bigger fish with a smaller bait." In other words, you can get more by giving less than you have to give in the stock markets. Who wouldn't like this? I think your face looks like a huge question mark right now, so allow me to explain more.
In the forex market, you need a smaller deposit (or bait) to control a larger contract value (or fish). How is that possible? It's because of leverage.
Leverage is basically a loan that brokers give to traders, so that they have the ability to control a large amount of money using very little of their own money.
In the forex market, the allowed leverage is much higher than in the stock market. In stock trading, your maximum leverage is only 2:1. But in the forex world, it can be 50:1 or even 200:1.
For example, if you want to have a $200,000 position, you can put in only $1,000 of your own, and your broker will give you the ability to control the $200,000 account with your mere $1,000. That means that if you make a 1 percent return, or $2,000, on your $200,000 investment, that is going to be much more than a 1 percent return on the $1,000 you put in, right?
I know that you are now all amazed and excited and probably on your way to open a forex account, but please, listen carefully to what I'm about to say.
While you can get a significant return, leverage has the potential to bring you equally significant losses. It enlarges losses and profits by the same magnitude. So be careful. Please.
Minimal or No Commissions
Most forex brokers charge no commissions or additional transaction fees to trade currencies online or over the phone. Instead, most brokers are compensated for their services through the bid/ask spread. Since these spreads are tight, consistent, and fully transparent, forex trading costs are lower than those in any other market.
Focus on One Thing and It Will Expand
Why do people engage in trade in general? Why does anyone sell anything? I know you are smarter than that and you know the simple answer: to make money.
People generally trade in order to make money, right? Now if you can answer one other question for me, we will be right on track. Do you know, what is traded in forex trading?
The answer is the same: money!
So basically, forex trading means trading money to make money. What's better than that? This is literally following the Law of Attraction to its core: like attracts like; money attracts money; make more money by focusing on money and trading money.
Now this does not mean that if you stare at your $1 bill for 10 hours, it will turn into a $100 bill. I am also not encouraging you to put all your money in a forex account and trade all of it for another currency.
I'm just suggesting that after you have finished this book, have become a Forex Diva, and have made your husband (or your boyfriend or your parents) very proud, then there is a strong possibility that you are making more pips than you are losing (discussed in Chapter 7), and that you can eventually even buy a private jet and fly over to your castle in Malibu.
Forex trading can be a lot of fun, and I am sure that with your special feminine skills and ability to manage risks, you actually can become a Forex Diva, but please keep this in mind:
Forex trading involves a substantial risk of loss. Forex trading is not a piece of cake. Forex education is crucial for beginners. Use only money that you can afford to lose to trade forex.
On the bright side, with a lot of studying and practice on free demo accounts on the web, you can easily become a successful trader and make money from the convenience of your bedroom, your kitchen, or even your bathtub. (Don't try the last unless you have a super-cool, waterproof laptop.)
(Continues...)
Excerpted from INVEST DIVA'S GUIDE TO MAKING MONEY IN FOREX by KIANA DANIAL. Copyright © 2013 McGraw-Hill Education. Excerpted by permission of McGraw-Hill Education.
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