Questions to Ask Yourself Before Trading Forex
by Grace Cheng
It is easy to see why Forex trading has gained such massive popularity recently. Who can resist the allure of trading a true 24-hour market which boasts round-the-clock action for 5.5 days a week?
A trader can simply open or close his position at any time, regardless of which market is opened, as long as his price is met. This is great for many individuals who hold 9-5 jobs, and could only afford the hours after work for trading action. Theoretically, you can trade either before going to work, or after work when you are home.
Forex is an asset class that is quite different from other assets like equities, futures and options. First and foremost, being the most liquid market in the world, there are always movements in the currency market, and such movements induce volatility in the market. Main currency pairs are constantly interacting with all the other pairs, and sharp moves are not uncommon when there are economic news releases, providing impetus to action.
Currencies can be much more volatile than other assets, but it is its volatility that attracts profit-seekers into the market in the first place. How do you profit when what you are trading is not volatile, and moves like a snail? Ask yourself: are you prepared to endure the volatile price movements before you could potentially make a profit? There are some currency pairs that are more volatile than others, and there are also those which hardly move too much, so you can take your pick of which ones you prefer to trade.
The Forex market is a complex mechanism. Even though technical analysis works quite well for the Forex market, it is the fundamental aspects that cause a currency pair to react in a big way. Are you prepared to learn all about what make the currencies tick? Or are you someone who prefers to buy a “black box” or “secret formula” from someone, and then trade according to it without having to analyse the market?
Learning will take up a lot of your time, especially if you are new to Forex trading. You must learn to use these technical and fundamental tools to guide you in your trading decisions so that you can identify the best entry and exit points for your trade. Do you think you can out in the committment to learn new things about the market all the time? Are you prepared to undertake all the work of analysing the technical and fundamental aspects of currency movements?
You may have heard that Forex trading has very high risks, and that is true in the sense that if you are not careful, it is very easy to lose money. The reason is due to it being highly leveraged. Most Forex brokers offer from a minimum of 50 times leverage, up to 400 times leverage for standard-sized or mini-sized accounts, with most traders opting for 100 times leverage, which is equivalent to putting up $1000 in margin so as to control $100,000 (1 standard lot).
As much as you can profit a lot from high leverage, you can lose a lot from it too. If you do not like to risk any money, and are very conservative with investing, then Forex is certainly not for you. Forex trading attracts risk-seeking investors, who do not mind taking some calculated risks in exchange for potentially better returns.
As you can see, Forex trading does not suit every one, because you actually need to devote both time and effort into learning the skills. No one can tell you if it is a suitable investment strategy for you, but it certainly is an interesting alternative of investment.