Trading the Greenback for Diversity and Profit
Most investors have never traded Foreign Currencies, spot FOREX, in fact prior to 1998 this market was not even open to individual investors. Now, the market is open and just like the evolution online trading, once the walls come down, things will never be the same as more and more active traders will find their way to the FOREX market and the many advantages it offers. Here are five major reasons to get your attention.
Number 1
The foreign currency, FOREX, market is the largest financial market in the world.
Everyday in the FOREX market, 1.5-2.5 trillion dollars are traded daily -- that's more than all the equity markets combined! In the year 2000, the New York Stock Exchange trade 11 trillion dollars in volume with an average stock price of $43-$45 dollars. Compare that to the 1.5-2.5 trillion dollars a day the FOREX market does and you can see the tremendous size of this market. More importantly, individual investors can now trade this market just as the Fortune 1000 companies and the big banks have done for years.
Number 2
The FOREX market is open 24-hours a day, so you can trade currencies when YOU want not just the limited time the stock market is open.
Number 3
Imagine a place to make money that doesn't have accounting concerns, investment banking deals, insider trading or conflicts of interest. With all of these attributes and more the FOREX market offers traders some unusual and exciting opportunities. Best of all, unlike in the stock market where there are over 40,000 stocks to chose from, in the FOREX there are only 6 major currencies to learn.
Number 4
Additionally, with so many problems looming over the US stock market, greater investment diversification can potentially help limit losses and preserve your wealth. And this is where FOREX can offer help. While the stock market may continue to be the greatest place to invest, one of the key elements we still need is a strong place to diversify when we can't get the returns we need or expect from the market. Many investors are putting money in bonds, CD's or real estate. However, while once thought conservative, bonds can go sour quickly if the interest rates start to move, CD's are getting less than 1% APR and real estate is not for everyone as it is not a very liquid investment.
Number 5
How about this? In the FOREX market, you can trade without paying commissions! That's right - no trade commissions. Just like the stock market, you have a bid and ask price - this is what you can buy and sell for. The difference between the bid and ask is the spread. In the stock market, you pay the spread and a commission. In the FOREX, you only pay the spread.
Number 6
You can open a FOREX trading account and get started for as little as $300. Additionally, unlike the 2 to one margin requirement in the stock market you can get up to 100/1 leverage in the FOREX market. Naturally, increasing leverage can increase your risk as well but the key point is that the leverage is there if you need it.
A great way to explore this new market is to open up a demo account. There are several online brokerage firms to choose from. On our Web site HYPERLINK "http://www.fxcm.com" www.premierefx.com you will find an online demo account that will allow you to trade as though you had real dollars in the account. You won't get to keep any winnings because the money wasn't real but you can have great fun and, at the same time, see if the FOREX market is for you. The unique thing about the online demo trading account is that it is the same trading platform you would use if you were trading real money. The trading platform is very similar to trading stocks. You have a BID and an ASK price, and the difference is the spread. The demo account uses the same real-time quotes the real trading platform uses. If you were to trade a demo account and a real account side by side you would get the same execution. I suggest anyone interested in trading in FOREX download a demo account and start trading, don't worry about loosing money - that is what it is for. The demo account is good for 30 days after that if you still want practice open another one. Once you start making money on your demo trades and feel comfortable with the process, it is time to start using real money.
Unlike the Futures market where you cannot trade a retirement account, you can trade your IRA's in FOREX. If you decide to consider using your retirement plan don't put all of your money in this basket of investing just like you should avoid doing that with other forms of investing try to limit your FOREX trading to no more than 30% of your retirement funds. Because of the leverage you can still get a tremendous opportunity on 30% of your trading account. Remember all markets have inherent risk, and the FOREX is not immune.
A key element to remember when trading the FOREX, or any market, is to exercise good money management and understand of risk reward. You have to be able to trade the same way every time and stick to it. Using a good money management system will allow you to do so. Use good stops and limits while trading. Never, place a trade in FOREX market without a stop loss, which will automatically protect you from further losses. Good risk reward is also using a limit order to manage your up side potential. If you are willing to take a 1% loss on the down side of your trade than you need to balance your risk reward and be willing to take 1.5-2% of a gain. You are probably thinking "I want to take as much of the profit as possible." Me to, the problem is when you are not watching the market it cycles up, all markets move up and down as it moves in its imbedded trend. If your trading system is even marginal at best say 50% accurate, you will still make money because your gains are greater than your losses. You just have to trade the same way every time.
The FOREX market offers you many opportunities and hopefully I have wet your appetite. Now, the next step is up to you.
Originally published in James Dicks: Buy*Sell*Hold magazine.