currencies is a challenging and potentially profitable opportunity for
educated and experienced investors. However, before deciding to
participate in the Forex market, you should carefully consider your
investment objectives, level of experience and risk appetite. Most
importantly, do not invest money you cannot afford to lose.
considerable exposure to risk in any foreign exchange transaction. Any
transaction involving currencies involves risks including, but not
limited to, the potential for changing political and/or economic
conditions that may substantially affect the price or liquidity of a
currency. Moreover, the leveraged nature of FX trading means that any
market movement will have an effect on your deposited funds
proportionally equal to the leverage factor. This may work against you
as well as for you. The possibility exists that you could sustain a
total loss of initial margin funds and be required to deposit
additional funds to maintain your position. If you fail to meet any
margin call within the time prescribed, your position will be
liquidated and you will be responsible for any resulting losses.
Investors may lower their exposure to risk by employing risk-reducing
strategies such as 'stop-loss' or 'limit' orders.
There are also
risks associated with utilizing an internet-based deal execution
software application including, but not limited, to the failure of
hardware and software and communications difficulties.
Forex Market is the largest and most liquid financial market in the
world. Since macroeconomic forces are one of the main drivers of the
value of currencies in the global economy, currencies tend to have the
most identifiable trend patterns. Therefore, the Forex market is a very
attractive market for active traders, and presumably where they should
be the most successful. However, success has been limited mainly for
the following reasons:
Many traders come with false expectations of
the profit potential, and lack the discipline required for trading.
Short term trading is not an amateur's game and is not the way most
people will achieve quick riches. Simply because Forex trading may seem
exotic or less familiar then traditional markets (i.e. equities,
futures, etc.), it does not mean that the rules of finance and simple
logic are suspended. One cannot hope to make extraordinary gains
without taking extraordinary risks, and that means suffering
inconsistent trading performance that often leads to large losses.
Trading currencies is not easy, and many traders with years of
experience still incur periodic losses. One must realize that trading
takes time to master and there are absolutely no short cuts to this
The most enticing aspect of trading Forex is the high
degree of leverage used. Leverage seems very attractive to those who
are expecting to turn small amounts of money into large amounts in a
short period of time. However, leverage is a double-edged sword. Just
because one lot ($10,000) of currency only requires $100 as a minimum
margin deposit, it does not mean that a trader with $1,000 in his
account should be easily able to trade 10 lots. One lot is $10,000 and
should be treated as a $100,000 investment and not the $1000 put up as
margin. Most traders analyze the charts correctly and place sensible
trades, yet they tend to over leverage themselves (get in with a
position that is too big for their portfolio), and as a consequence,
often end up forced to exit a position at the wrong time.
example, if your account value is $10,000 and you place a trade for 1
lot, you are in effect, leveraging yourself 10 to 1, which is a very
significant level of leverage. Most professional money managers will
leverage no more then 3 or 4 times. Trading in small increments with
protective stops on your positions will allow one the opportunity to be
successful in Forex trading.
Utilizing Stop Loss Order
stop-loss is an order linked to a specific position for the purpose of
closing that position and preventing the position from accruing
additional losses. A stop-loss order placed on a Buy (or Long) position
is a stop-loss order to Sell and close that position. A stop-loss order
placed on a Sell (or Short) position is a stop-loss order to Buy and
close that position. A stop-loss order remains in effect until the
position is liquidated or the client cancels the stop-loss order. As an
example, if an investor is Long (Buy) USD at 120.27, they might wish to
put in a stop-loss order to Sell at 119.49, which would limit the loss
on the position to the difference between the two rates (120.27-119.49)
should the dollar depreciate below 119.49. A stop-loss would not be
executed and the position would remain open until the market trades at
the stop-loss level. Stop-loss orders are an essential tool for
controlling your risk in currency trading.
Fast Market Policy
spot foreign exchange market, at times, exhibits extreme price
volatility, a condition known as a "fast market". Fast market
conditions may be caused by various factors including, but not limited
to, news releases such as non-farm payroll numbers, order
imbalances-significantly greater orders of one type (e.g., "buys") than
another type (e.g., "sells").
During the extreme price volatility in
fast markets, currency pair prices will "gap" and spreads widen. A
price gap occurs when the price of a currency pair either jumps or
plummets from its last bid/offer quote to a new quote, without ever
trading at prices in between those quotes. As an example, the Euro/US
Dollar currency pair may move from a bid/offer of 1.1891 - 1.1894 and
begin trading at 1.1941 - 1.1944, without ever trading at the prices
between those quotes.
The standard industry practice for currency
dealers, including dealers on the interbank market, during fast market
conditions and price gaps, is to set market levels and execute orders
manually without the use of automated systems or services. The process
during fast markets is typically:
Initially, major money
center banks and other online price providers halt all direct dealing
and their pricing engines are suspended,
Currency dealers analyze event and determine the correct price,
Prices enter market 20-30 pips wide or more,
Spreads in market narrow as more currency dealers enter the market.
such an event, there may be a delay in trade execution, which may be
significant, while rates are cross-referenced to ensure valid
execution. Further, stops placed close to a market that has traded
through the stop price are re-priced on the next best tradable price.
Thereby, a specified rate order does not provide a fixed-price
guarantee to the counterparty.