As with anything, there are risks and benefits to trading on the Forex. Foreign Exchange is an extremely large global market which is open 24 hours a day without fail, due to these factors and others volatility is to be expected. Forex provides you with the possibility of a very high leverage allowing you to begin trading with smaller amounts, which is good for the beginning investor. On the opposite end of the spectrum trading with a higher leverage can result in much higher losses. Even a small movement can result in the loss of your entire deposit when trading under high leverage. This is a factor to keep in mind when placing your trades. Certain practices can be employed to minimize risk while trading and they will be explained below.
Calculate your risk! A commonly used term in trading is The Risk to Reward Ratio. Calculating the risk involved in a trade is a simple yet overlooked step to help minimize bad trades. Simply put your risk-reward is the money invested in a given currency to begin the trade versus your projected gain, your profit. If invest $100 and I project a growth equaling to $200 profit, I have a risk to reward ratio of 1:2.
It is worth noting that most professional traders recommend trading on a risk to reward ratio of 1:5, which allows more lee-way should the currency movements not quite turn out as expected. You will have to wait to find a trade at this ratio but it is well worth it, besides there is no harm in taking extra care when working with your hard earned cash.
Another method to minimize your risk is making proper use of a margin. This act in itself can result in rather large losses if used incorrectly. A margin account leaves you with debt and should only be used in a limited capacity, around 10% or lower in my opinion. Your margin account fluctuates and could leave you in the red. I do not recommend margin trading to those beginning with trading on the Forex however it is a tool used by many traders to increase profits.
Stop losses are another vital component of minimizing risk. A stop loss is placed and automatically buys or sells currency when reaching a defined amount. Moving your stop loss according to currency motion not in your favor is an effective way to accurately reduce losses. Divide your trade into three or more different risk groups and switch your stop loss around. Using a trailing stop allows you to set a defined percentage or number of points keeping a trigger at a fixed value. By making use of a trailing stop you can limit your losses to a fixed percentage.
As before mentioned the high leverage available in Forex can be a huge benefit. Due to the leverage making a good trade can net you a large reward on investment, sometimes even a few thousand dollars on an investment of hundreds. Other benefits of Forex include the flexibility of your trading hours. When trading on a twenty four hour market you choose when you want to work and for how long, allowing easy integration into most peoples’ daily lives. When compared to stock investment Forex trends are much easier to spot allowing you to better research and forecast movement for your investment.
Whether you wish to trade full time or supplement your income by using your savvy, Forex is a wonderful way to manage money. Learn as much as you can in regards to minimizing risk and you will have a much easier journey into the world of currency trading.