Wealth Dragons co-founder John Lee advocates wealth building through property investing and forex trading. In the second part of the three-part series, he shares with Personal Wealth about why he favours forex trading.
FOREX trading became Lee’s second way to build wealth after a friend introduced him to it. He prefers trading currencies as he feels it provides the fastest returns on investment (ROI).
“Property investing can be slow [comparatively]. It can take two to three months to sell or acquire a property. But when you trade forex, you can make money now. Depending on your risk profile, you can make £200 to £500 in a day,” he says.
“Even with our forex trainers, their worst ROI over three months is 18.6%. The goal is to spend only two to three hours a week trading forex. That is why we teach forex.”
Gains made from trading financial instruments such as stocks and commodities could be just as lucrative. But Lee says currencies are a more liquid asset class, and that no other instrument sees so much movement.
“You can understand stocks and commodities, but a lot of it [the price movements] is based on news, whereas currencies are more complex. Let’s say you had invested in Apple Inc when Steve Jobs passed away, or in an airline when one of its planes was shot down, [such events] will affect the price of their stocks,” he illustrates.
“With currencies, there is so much volume and many different currencies around the world. It is very rare for all currencies to see a drop in price at the same time. It can happen, but [when] one drops, another increases. Currencies are liquid and that is what makes trading them so attractive.”
Lee has several guiding principles when it comes to trading forex. Firstly, traders should have some certainty in the market’s direction, whether it is going up or down.
“That is what we call a trend,” he says. “There are certain indicators we use [to detect trends]. We call these metrics, and that we have to input. Metrics tell us where the trend is likely to move. A lot of forex traders use support and resistance lines [in technical analysis], which is very old school.”
Next, traders need to be mindful of risk management and know when to enter the market. Lee warns that one should never risk more than 2% of his investments on a trade or enter the market without knowing when to.
“A lot of people blow all their money on one trade or enter the market randomly. But we have chart setups, where if you see what we call consecutive candles in a certain order, there is a high chance that the market will switch. This is something we call a snapback. Then you have to know how to get out of the market.”
Lee also advises against scalping the market, referring to a forex trading strategy where profits are made when buying or selling currencies, but the position is held for a very short period of time. As it is closed for a small profit, traders usually require larger deposits as leverage to make the short and small trades worthwhile.
“In forex trading, there are different time frames you can trade — a minute, a day, a week or a month. When people scalp the market, they are sitting at their computers on really short time frames, waiting … to get in. And they will keep waiting until it goes above the entry point,” he says.
“It is gambling because there is no strategic reason why you are entering and there is no strategic way of getting out. It is not a good strategy, but that’s what the internet teaches.”
Although some may advocate intra-day trading, Lee says the more times traders enter and exit a trade, the higher the risk of losing their money.
“You need to stay in the trade longer, so the first thing you have to do is identify the trend. The moment you can identify it, it gives you less risk. The goal of our strategy is for every 10 trades [you make], you lose six. But the losses are small and the wins are big, so the wins outweigh the losses.”
In forex trading, Lee focuses on the strategies employed instead of having preferred currencies. So, instead of asking which currency one is investing in, a better question to ask is which strategy one should employ in a particular scenario. He favours the snapback, breakout and crossover strategies as “these allow us to enter or get out at the right time, trade every day if you want to, or if you want longer trades”.
The currencies Lee invests in must have high liquidity and enough trading volume. While he declines to reveal the ones he likes, he does recommend looking at those with larger trading volumes. “For example, the Singapore dollar has some trading volume, but it is nothing compared with the pound, euro or US dollar,” he says.
“The Euro/USD can move 200 to 300 pips [a pip is the smallest price change an exchange rate can make] in a day or more, while other currencies don’t move as much. The more frequently [the market moves] or the more volatile the market is, the more chances you have of making money.”
Unlike the average investor, Lee isn’t particularly concerned about economic outlooks and how they would affect his investments, reiterating that his strategies are recession-proof. “I don’t care if the market is going up or down, or is flat. If you invest the way we do, [your investments] won’t be affected,” he says.
“But if you ask me about properties, there will always be demand. Prices will always increase over time due to supply and demand. I believe it is one of the best asset classes to invest in,” he adds.
“If the price increase is so high and people can’t afford to buy, they will rent. And vice versa; when prices go down, everybody will start buying and I can sell.”
This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 1 - 7, 2015.