As the world’s largest market and one which sees a staggering $5.3 trillion dollars traded each day, Forex trading is a term which pricks the ear of anybody with an entrepreneurial spirit.
Forex trading involves the trading of one currency for another at an agreed rate; this rate fluctuates according to economics, geopolitics and many other factors. By speculating on whether a currency’s value will rise (appreciate) or fall (depreciate), Forex traders can earn profit on their investment. In Forex, leverage enables you to trade without putting up the full amount which can be both a risk and advantage.
There are both risks and rewards with Forex trading and it is important for anybody to understand these before starting.
Potential Risks
There is always risk when it comes to trading and Forex trading is no different. When trading on margin, traders can incur significant losses very quickly and particularly if no risk management strategy is employed. Whilst high leverage enables investors to earn large sums from small amounts, this is also a double-edge sword as you could make significant losses if the market moves against you.
Another risk is that news from around the world can shake up the market; this makes it somewhat unpredictable. This also means that if you are to succeed, you must be constantly up to date on global and daily affairs and the economy. This can be very time consuming and stressful.
Potential Rewards
As established, due to high leverage, it allows traders to large amounts off a small deposit as the rest is lent by a broker. With a thorough understanding of the market (there are endless resources and up-to-date news and advice online); you can mitigate risk by making intelligent decisions. When you do not invest more than you can afford to lose and have a great understanding of the market; Forex trading is a fantastic way to earn capital.
There is also no market risk as nobody can corner the market, you can profit when a currency is either appreciating or depreciating and there are far fewer choices than the stock market. Due to the market being extremely liquid, it also means that you can always trade throughout the day.
The market is also open 24 hours a day (the only market which is) and trading is made very simple thanks to clever trading platforms, such as OANDA. Through these platforms you can execute trades quickly and easily, plus get all the latest news and information.
These are the key risks and rewards with Forex trading. As with any trading, there is risk and the high leverage is a double-edged sword. However, with sound understanding of the market and making intelligent trades; it can also prove to be very profitable.
