Forex Trading (Foreign Exchange Trading) is now becoming a popular means by which people are investing their money in expectation of high returns. However, as in all investment opportunities, one has to be educated about the risk associated with it.
Forex trading is more suited for an individual that can afford to lose the money that they invest and are characterized as above average high risk takers. So, if you believe yourself to be a conservative to a moderate risk taker or are thinking about taking money from your 401K, IRA or any other savings for retirement; it would be advised that you carefully rethink and re-strategize on whether or not you really want to invest at this time and if this is a viable option for you.
Forex Trading: The Risks
The risk associated with Forex trading is different than that associated with the local trading of stocks such as: NASDAQ and Dow Jones are that the market is not centralized and the slightest movement in the market will have a proportional impact on your investment, good or bad. This is so as you are dealing in the currencies of different countries. The value of these currencies at any point in time can be impacted by: change in the political landscape, their international credit ratings and any other factors that may contribute to the price or liquidity of the currency.
This will no doubt substantially impact your investment. However, it is important to note that the major currencies that are normally traded are the: British Pound, Japanese Yen, US Dollar, Euro Dollar and the Swiss Franc; and the economies of these countries are relatively stable in comparison to others. So it is not all doom and gloom, but be sure to measure to acquire all the knowledge you can about the various markets and when in doubt enlist the assistance of a licensed trader.
Limiting your Forex Trading Risk
The use of the “stop loss order” or the “stop limit” order is a risk reducing strategy to help mitigate against complete loss of your margins, when participating in Forex trading. For example: a stop loss order can be issued for 5% below the price you paid for the forex and will limit your loss to that 5%. As such, you have pre-determined the amount of losses that you are willing to take. You do not need to take unwarranted risk, employ the use of the “stop loss” in the event that you miss a margin call within the specified, as they will liquidate your funds without prior notification and you alone will be responsible for your losses.
Invest but invest wisely and be sure to research and employ all best practices that you can to ensure that your losses are minimal but your returns are large.
For individuals interested in making money without having to leave home, forex trading is among the best methods. Forex trading involves buying and selling foreign currencies in the hopes of making a profit. When an individual sells one foreign currency for more than he or she invested in different foreign currency, a profit is made.
How Is Forex Trading Different Than Other Trading Systems
The main difference between forex and other financial markets is its exclusive interests in foreign currencies; however, one should not wrongly assume this to be forex’s only difference. Individuals who are familiar with the stock market and futures should be aware of their centralized locations. Instead of having to deal with the market opening in Sydney and closing in New York, forex traders work independently of this global time zone restraint.
What Individuals Need to Know When Starting
The primary skill an individual needs to have when beginning forex trading is the ability to read quotes. Without this skill, an individual will need to have an endless supply of blind luck.
- The first quote an individual needs to know how to read is the basic forex quote. A basic forex quote will show a pair of currencies; USDCAD, EURJPY, XAUUSD are just a few examples of common forex quotes.
- Each quote will have six letters. The first three letters of a quote are a specific currency, and the last three letters are a different currency.
- The first currency is the base currency, meaning it has a value of one, and the second currency will reflect how many of the second currency are equivalent to the first currency.
The second quote an individual should know is the two-sided quote. In comparison to the basic forex quote, the two-sided quote is much less prevalent. Like the basic quote, a two-side quote consists of six letters, but there also are two sets of numbers following the letters. Again, the first three letters are a currency, and the last three letters are a different currency. The two sets of numbers are the ask and bid prices. The ask is for how much an individual can buy the base currency, and the bid is for how much an individual can sell the base currency.
Currency trading is one of the many financial markets that investors use as a vehicle for making money. However, while these markets are open to anyone that wants to invest his or her money, it really pays to understand exactly what a person should expect before getting involved in foreign exchange.
Foregin exchange markets, which are usually just referred to as Forex, are a way of taking an investment and growing it by using the exchange rates for currency. For instance, say that a trader in New York converted $1,000 U.S. dollars into British pounds. If the exchange rate changed the next day, with the pound becoming even more valuable, then the trader could turn the investment back into dollars and make a profit. That is how the Forex market works, but it’s done with hundreds of millions of dollars and with every currency in the world every, single day.
How To Make Money With Currency Trading
It’s a fairly simple process, at least in theory. Traders have to pick which currencies are going to go up in value, and make sure to convert a certain amount of investment capital into the currency in question. Once the currency goes up in value the trader transfers it back, and makes a profit.
However, that said, it’s a lot more difficult than many people think to figure out which currency is going to shoot up in value and which one is going to drop down. For instance, the value of a currency is often directly proportional to how well that country is doing politically as well as financially. For instance, a country on the brink of civil war will see the value of its currency dropping as people try to shed it and to get away before the conflict erupts. Alternatively, if a country makes a breakthrough in science and begins using that breakthrough to build new and improved products which are all the rage, then its currency value will go up because of how well that country happens to be performing. For that reason traders have to constantly keep up not just on the news regarding how well a given currency is or isn’t doing, but also on world events and financial events in order to try and figure out what impact they’ll have on the financial markets and on the currencies the trader invests in.