Is Forex Market Trading Right For You?
The foreign exchange market, known as Forex for short, refers to the market where currencies are bought and sold. Forex is one of the fastest growing markets in the world. From 2007 to 2010, Forex market activity increased by 20%, with an average daily turnover reaching almost $4 trillion in April of 2010! But, is Forex market trading right for you? There are plenty of ways to invest your hard earned money. Some at low risk and low return and others (such as Forex) at very high risk with the potential for large returns. With so much many at stake, though, you may be asking yourself if you have what it takes to become a successful investor.
How Does Forex Trading Work?
Understanding how Forex trading works is relatively simple, though there are of course subtleties that can take a lifetime to master. To make a valid Forex transaction, there must be two currencies involved. This is why you’ll see market quotes displayed in pairs, such as GBP/EUR.
Remember that you are always buying or selling the currency on the left side of the pair. This listing is called the base currency while the one on the right is known as the cross or quote currency. The base currency will be the basis for any buy or sell action you take out. For instance, if GBP/EUR currently traded at 1.43 that would mean that you’d need to spend 1.43 euros to purchase one GBP. If the roles were reversed, and EUR was on the left and GBP was on the right (EUR/GBP) that would mean you’d need to pay 0.69 GBPs to buy one euro.
Is Forex a Volatile Market?
A market’s volatility refers to the pace and predictability that its prices change. For instance, a daily currency fluctuation in the Forex market is usually very small. In fact, there is often less than a 1% change between currencies. That doesn’t mean that it can’t be a volatile market though. A currency’s value is reflective of its country’s current economic situation, and you only have to look at the current situation with the euro and the prospect of a Greek exit from the EU to see what a major effect it could have.
The reason Forex trading is so risky is because of the extreme amounts of leverage involved. Because daily movements in currency pairs are generally small, leverage is used to magnify the changes. This means you can literally make (or lose) thousands of dollars in mere fractions of a second. This type of trading is definitely not something you want to jump right into!
However, it’s also important to remember that movement is a necessary staple of any market when it comes to trading commodities or investment vehicles. An increase in market volatility often leads to investors finding a lot more trading opportunities. Any large market swings can result in huge potential gains as well as the equivalent losses, so traders need to take the extra precautions during these periods.
Is Forex Market Trading Right for You? – Final Thoughts
If the Forex market sounds like an avenue you’d like to pursue, take a look at the current FX Rates and better familiarize yourself with the Forex market. Many Forex trading platforms (see my resources page for the trading platform that I recommend) will allow you to trade with “paper money” to gain practice and build your confidence. As with anything, knowledge is power and any research you can do beforehand will strengthen your ability to make wise investments in the long-run. While I prefer investing for the long-term hands down, many enjoy living on the riskier side of life. If this is you, remember to never trade with money you cannot afford to lose!
