This is a guest post by Forex Traders. Before opening a forex account, make sure you understand the risks!
The foreign exchange market or forex market can be an interesting way to invest money. Forex Trading occurs when an investor trades currencies from two different countries in the hopes of profiting from this exchange. An example of a foreign exchange transaction occurs when a person sells the Euro and buys the US dollar. These types of trades are usually completed via a broker or market maker.
That said, it was not until quite recently that individuals could trade currency in a foreign currency account as this type of trading was generally the domain of large banks, financial institutions, hedge funds and the very wealthy. Thankfully, the advent of the internet allowed everyday investors to take part in forex trading through the use of internet-based brokerage accounts.
With respect to currency itself, on a day-to-day basis, currencies rarely fluctuate over one cent – and these currency changes are largely based on supply and demand factors. Currency trading does come with plenty of risk as due to the availability of leverage. Leverage is a loan that is given to an investor from the broker that is in charge of that person’s forex account. In forex trading, this leverage is one of the highest that is available to investors.
As the forex market is highly liquid, forex investors can also take part in very large trades. In fact, in many cases, an investor can control $250,000 by putting down $2500 and borrowing the remainder of the cash from her or his foreign exchange broker. While an investor can make a significant amount of money when there is only a small favorable change in currency rates within an extremely short period of time, a person can stand to lose a tremendous amount of money if the currency decreases in value in that same short period of time as well. In the example mentioned above, an investor can stand to lose $250,000 even though he or she only originally invested $2500. However, despite this significant risk, many people engage in forex trading as the availability of leverage in currency trading is extremely appealing.
Moreover, many people are drawn to currency trading as the forex market is the only market that is available to people twenty-four hours a day. For instance, when a market closes in the United States, other markets in different parts of the world will just be opening for the day. Thus, traders can trade currency at various times throughout the day and night. As many people work during daytime hours, these types of investment hours can appeal to this demographic.
Investors are also drawn to forex trading as there is little capital required to start engaging in trades. Other people are drawn to forex as the one-click trading is simple and instantaneous. This feature is beneficial as investors can make trades as soon as they see an opportunity. Many online forex trading sites also offer charting tools that help traders to determine when they should exit or enter a certain trade.
However, when the foreign exchange market are compared to the equity markets, the risks involved with forex trading are indeed higher. As mentioned previously, losses can have a tremendous negative effect and in some cases due to the leverage involved, these losses can decrease most of the money in your brokerage account in mere minutes. This information is important to keep in mind as when news that may affect the value of currencies are released, experienced traders will react quickly which in turn can have an effect on the value of the currency that you, the beginner investor, is currently holding. Thus, it is important to evaluate the risks that are involved with the amount of leverage you are willing to take on. Conversely, when one invests in the equities market, the majority of the investors do not use leverage and thus the loss would be much less if the value of your investment moved against you.
While you do not need much capital to start trading on the forex market, this fact does not necessarily mean that you should begin to trade on the forex market with little capital. Often many beginner forex market traders fail due to a lack of capital.
Still interested in trading on the forex market despite the risks? Well, then you should understand that you must be both knowledgeable and disciplined when it comes to trading forex markets.
In fact, many professionals recommend that you spend months on a forex demo account before you begin to invest real money. After you are profitable on a consistent basis for a long period of time, then you should then start to invest real money.
Other experts suggest that you also determine your profit goals and loss boundaries ahead of time and stick to these figures. Along similar lines, experts suggest that you should also set your stop losses to risk no greater than three to five percent of your total capital per trade in order to ensure that all of your capital will never decrease in mere minutes.
Thus, while forex market trading can prove to be a profitable venture, it is important to be an educated investor if you decide to partake in this type of trading.