Discover the real risks of FOREX trading, plus how to avoid costly speculation, and why you should embrace a diversified investment strategy for more stable long-term gains.

I often get asked my opinions on FOREX trading.

Dealing in foreign currency futures or options can make sense for a business that is forced to take on unacceptable currency risk. Futures or options let the business pass off that risk to speculators who wish to accept it, often overlooking the serious FOREX trading risks involved. That’s the textbook explanation for the existence of futures or options.

Textbooks often fail to mention that most speculators who succumb to the lure of futures and options trading wind up losing money. It doesn’t matter if they trade foreign exchange, or a traditional commodity such as wheat or copper. Most wind up losing, which clearly illustrates many of the FOREX trading risks that traders face.

Suppose an investor starts out with the intention of trading FOREX or pretty much anything else. For safety’s sake, the investor may decide to lose no more than, say, $15,000. After a few months of trading, investors will typically have broken even on their trading activity—ignoring the commissions they’ve paid. But if you count commissions, which obviously must be paid, the investor will have lost about $15,000.

In other words, futures trading works like bets on a series of random events, such as coin tosses. You’ll win a few and lose a few, but you won’t win enough to pay your commissions, let alone leave yourself with a profit.

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In addition, your main trading competitors will tend to be highly capitalized firms whose employees are highly experienced in the markets they trade in. These markets still carry a high random element. These firms can prosper anyway, since they don’t need to ‘beat the market’. They just need to beat the amateurs.

If you invest the same sum in a portfolio of stocks, you might, at worst, spend only a few hundred dollars on commissions. This disparity gives futures and options brokers a huge incentive to recruit clients and try to pump up their enthusiasm and confidence in futures and options trading.

Futures and options on currencies or anything else offer a great deal of leverage. If you could get that leverage working for you consistently, you could earn 50% to 100% or more per year on your initial stake.  Even today we see lots of ads for books, seminars and software that purport to show how you can make that kind of return on a consistent basis. Some even go so far as to say you can do it in a few minutes a day.

This raises an obvious question: if it were possible to make that kind of return, why would anybody work?

Our longstanding advice is to invest in well-established companies and spread your funds out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities. Moreover, stay out of currency trading, penny stocks, new issues, options, futures and other high-risk investments. That way, while you may experience modest losses when markets drop, you will probably show overall positive results over time, effectively helping you avoid unnecessary FOREX trading risks.

We’ve explained the pitfalls and inherent difficulties of trading in foreign exchange (FOREX) futures and options, especially from the perspective of individual investors and speculators. While these financial instruments can serve a legitimate purpose for businesses looking to hedge against currency fluctuations, the situation is often far less favorable for non-professional traders.

In theory, futures and options allow companies to transfer currency risk to speculators who willingly take it on. However, most individuals who are drawn to FOREX trading ultimately lose money. This loss occurs because, over the long run, the outcome of trades tends to resemble random events, much like a series of coin tosses. Even if the odds of winning a particular trade appear equal to the odds of losing, transaction costs such as commissions quickly erode any gains. The result is that, on average, speculators break even before fees, but suffer a net loss after paying commissions.

Additionally, individual traders face intense competition from highly capitalized, experienced firms. These firms have the knowledge, resources, and discipline to profit by consistently outperforming less skilled participants. They do not need to surpass the overall market; it is enough for them to outsmart the amateurs who lack their advantages.

In contrast, we advocate a more conservative, long-term approach to investing. By investing in well-established companies across the five main economic sectors—Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance, and Utilities—an investor can spread risk more effectively and likely achieve more stable returns over time. This approach incurs relatively minor fees and avoids the pitfalls of speculative trading.

In summary, while FOREX trading and other forms of speculation may seem like opportunities for big profits, they usually result in losses for most participants. Instead, a diversified portfolio of quality stocks is a better strategy for consistent, sustainable growth.

What long-term benefits do you believe a diversified portfolio can offer in comparison to taking on substantial FOREX trading risks?