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Why invest in the Forex market?

The answer is simple – for many different reasons, which we will examine, Forex Market is thought by many to be a perfect market.

Forex is short for foreign exchange and is the world’s largest market. Completely virtual, its size makes it less open to outside influence and less volatile than other markets. Forex Market generates over $3 trillion in revenues every day as a result of exploiting small fluctuations in the value of foreign currencies. It is a very dynamic business and there are significant opportunities to make a hefty profit, however, although there are a huge number of people now involved in forex trading it is still something that remains relatively unknown to the majority of people.

Forex is accessible – you don’t need a great deal of money to get involved so it provides an excellent opportunity for small investors to make money. One of the benefits of Forex is the option to pay only a small proportion of the purchase price in advance, it is also free of commission and is not subject to exchange fees, instead the trading cost is incorporated within the bid/ask spread offered by the market maker. This makes it an excellent prospect for those who wish to trade frequently.

Learning how to trade Forex is a skill that is almost guaranteed to pay once you have mastered it. Forex is not easy, so you will need some knowledge to make good investment choices. Forex is not something that can be mastered in a single day, so it does take some study to become good at it. You need to see it as a long term investment in your financial future.

Unlike other markets such as futures, Forex is available to trade 24 hours a day, 7 days a week. This is because trading hours overlap each other in the various countries around the world, meaning that the market is almost always open. There are major forex trading centres in London, New York and Tokyo as well as other cities such as Sydney. With the different time zones in operation, you can trade at any time of the day or night, and day of the week; including Sunday.

Forex is known as a leveraged market. This can work for or against you, and means that, for example, if your broker offers you leverage of 100:1 leverage, for every 1 unit in your account, you are able to control 100 units. If you can manage this correctly then there is the possibility of making lots of money quickly. By treating Forex as your own business and taking responsibility for it, you can find yourself in a very lucrative market indeed.

It has been said that “not trading forex is like leaving it there for someone else to pick up” and that “trading forex is like having an a.t.m. machine on your own computer”. Forex can be an extremely lucrative business independent of your location and time of day. It is the most liquid market in the world of trading and is all about freedom – some have said that trading forex is like picking money up off the floor! Clearly with the number of private and corporate investors investing in this market, it would seem to be an incredibly lucrative opportunity to get involved in.

Unlike the London Stock Exchange or the American Stock Exchange, Forex is not a physical market. Instead it can be described as a worldwide network of banks, investment firms, hedge fund, currency traders, and other financial and banking entities. Forex operates as an over-the-counter (OTC) market also known as an off-exchange market. The Forex market is constantly fluctuating, which means that if the rate of exchange on a particular currency is not good enough today, then you can certainly expect some difference in the coming weeks. Forex trading happens by phone, on the internet or via a broker.

Changes in the currency market happen fast and these changes are affected by many different factors. The Forex market is also continually growing as the number of individuals participating in the market increases.

Trading Forex is absolutely not a game, however many people feel that it is more like gambling, and consequently don’t treat it seriously. Forex is a serious way to make money, and it is possible to get involved at ground level. Trading forex is perfectly legal and is based on probabilities, provided you can accurately weigh up the associated risks and rewards, you should do well!

Common Mistakes Made When Investing in the Forex Market

Learning to trade Forex is a learning curve and every trader is bound to make mistakes no matter how experienced they are. The important thing to remember is that you should treat any mistake as an opportunity to learn from it and remember that tomorrow is another trading day, so you can just start all over again. Here we take a look at some of the most common mistakes made by Forex traders, and how we can try to avoid them.

One of the biggest and commonest mistakes is to become overconfident. It often happens after making a few successful trades, when the trader stops reacting and starts predicting instead. Rather than reading the market and following the trends, the trader starts to try and guess what the market will do. A good trader will identify the existing patterns in the currency market, carrying out extensive research and then placing a trade that will enable them to cash in on it. Not doing this is a big mistake – experienced traders have a saying “the trend is your friend”, which is well worth remembering.
Another mistake that can occur as a result of overconfidence is that of adding to losing positions. If you start to see that the market is going against your position, you should not add to it any more – this is the time to close that position. You will lose trades, don’t try and correct them by predicting the market will change. You need to get out as soon as you can and move on to the next one.
Don’t set your leverage too high. Aim to use a maximum of 1% to 2% of your trading capital on a position. Insufficient capitalization occurs when you use too much leverage – also known as margin. This is effectively money borrowed from the broker, and if you are caught up in a loss situation, you can find yourself with a high interest margin debt to your broker to worry about. Forex brokers normally have a set maximum allowed for margin debts – this typically 50% of the value of the trading account. If the debt goes above this, the broker can make a margin call – this is a request for you to add some more money to your account as collateral. Inexperienced traders should try and avoid margin debt until they are more familiar with the system.
It is important not to overtrade. If you make too many trades you are spreading yourself too thinly, and are putting yourself at risk of receiving a margin call. You can also lose focus by trading in this way, so stay in control and limit the number of trades you are making.
You should always use stop-loss orders apart from in a few very specific situations. Stop-loss orders do exactly what their name suggests – they stop you making too much of a loss on your trades. The stop-loss order is a pre-determined point at which you will close your position on that trade so as to avoid losses that you cannot afford. Make sure you use them correctly!
Do not treat Forex trading as a hobby – it is a serious business and should be treated as such. Hobbies such as golf, travelling and eating out always cost you money, whereas the purpose of a business is to make money. This is what you want from your Forex trading so you should approach it in a businesslike manner which means having a plan and keeping records.
Always do your research. Don’t take information or “tips” at face value – you should always make your own enquiries and seek second or third opinions before putting your own money in.
Don’t invest in a currency for the sole reason that it is cheap. Many traders believe that because a currency rate is cheap that they can later reap fantastic profits but this is not always the case. Always do your research to see if you can establish why that particular currency is so cheap and look at its trend history. This will give you the information you need to decide whether to make the trade.
Make a plan. If Forex trading is your business then you should have a business plan in place. Your plan will help you avoid making some of the most typical trading mistakes and save you money. Your plan should include some established entry and exit rules which should form the basis of your trading strategy.

By being aware of these pitfalls and the potential mistakes that a Forex trader can make, you will go a long way towards making sure that you finish up with a profit.

Find out more about Best Forex Brokers and read my post about Automated Forex Trading Software.

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