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Forex Investment:
Is Forex a Good Investment?

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Forex Investment:
Is Forex a Good Investment?

The global forex market has an average daily trading volume of over $6 trillion, making it the biggest financial market in the world. Forex attracts all levels of traders from novices just learning about the financial markets to seasoned professionals. It is estimated that around 9.6 million people trade forex online around the world.

Forex trading is undoubtedly popular, but is it a good investment? Let’s have a look at what makes it an attractive investment choice for traders.

1. Volatility

The degree of movement in the price of a financial instrument over a certain period of time is known as volatility. It is this volatility that allows traders to earn in the financial markets. High volatility carries high risk but also the possibility of making large gains.

You can regularly expect to see price movements of around 50-100 pips for the major currency pairs on almost any day of the week GBP/USD, USD/JPY, and USD/CAD can even pass more than 100 pips a day.

So, for instance, if you expect a price move of 90 pips for the EUR/USD and you hold one standard lot (100,000 currency units), this amounts to a potential gain of $900 (one pip in a standard lot is worth $10).

You can expect the minor pairs, e.g. GBP/NZD and GBP/AUD, to pass over 200 pips a day. Exotic pairs, e.g. USD/THB and JPY/NOK, are the most volatile and can on average, pass over 400 pips a day. All this great volatility makes forex trading an appealing investment with many opportunities to earn.

2. High Liquidity:
More Opportunities to Earn

The forex market is the world’s most liquid financial market. This high liquidity means that forex can be easier to trade than other financial instruments. For example, the stock market has low liquidity which makes it hard to trade in falling markets. On the other hand, the high liquidity of the forex market makes it possible to trade easily in both rising and falling markets.

In a falling market, you can use a technique known as short selling to profit from falling prices. For example, let’s say that the EUR/USD is trading at 1.1328 and you sell it hoping that its value will decrease. If the trade closes at 1.1233, you make a profit of 0.0095 or 95 pips.

With forex trading, you can also potentially earn more from your investment using leverage.

3. Leverage in
Forex Trading

One of the drivers of forex trading popularity is the leverage offered by forex brokers. While brokers in other financial markets like the stock market offer leverage in the 20:1 to 50:1 range, it’s now common for forex brokers to offer traders leverage in the 400:1 to 500:1 range.

Leverage is a trading tool that allows traders to take large positions with little capital. For example, you can open a $50,000 position with just $1,000 in your account using 50: 1 leverage. Leverage can magnify profits but also losses.

Example: Trading with and without leverage

Without
Leverage

Let’s say you have $1,000 in your account. The EUR/USD is trading at 1.1268 and you believe that the EUR will strengthen against the USD and so you decide to buy a micro-lot of the EUR/USD. If the price subsequently rises to 1.1366, you’ll have gained 0.0098 or 98 pips. Your profit will be $9.80 (one pip in a micro-lot is worth $0.1).

With
Leverage

Continuing with the example, if you use 50:1 leverage, every dollar you invest is worth $50 and so with your $1,000 margin you now have $50,000 in your account and the $9.80 profit is magnified to $490.

4. Accessibility

The careful selection of a CFD provider is one of the key steps in building a winning trading strategy and increasing your chances of potentially getting something out of CFD trading. You have to ensure that a broker meets your trading expectations and requirements when you open a CFD trading account. A broker also has to match your trading style and provide you with the right tools and support. The best CFD traders are the ones who understand market dynamics. CFD brokers can perform an invaluable service by providing their clients with access to the finest charting tools, market updates, economic calendars, expert financial insights, signal indicators, webinars and a comprehensive FAQ database.

5. Regulation

Forex trading is regulated by several bodies including the FCA, ASIC, CySec, and FSA. Regulated brokers are monitored heavily and expected to follow rigorous operating guidelines. If you trade with a regulated broker, you know that your investment is safeguarded. This way you know that if you put in the work and set realistic goals, you can succeed in trading without having to worry about scams.

6. The Level of
Transparency

There is no one location where currencies are traded and so the forex market is deemed not to be centralised. Consequently, the market is very transparent and any person who wants to invest in it can. Getting started with trading comes down to owning a computer, having internet access and being able to analyse real-time data and check the latest news.

7. The Cost of
Trading is Low

Forex trading rarely involves any exchange fees and commissions. Most forex brokers provide commission-free trading, only requiring traders to pay the spread (the difference between the bid and ask price of a currency pair).

Additionally, most forex brokers are now offering ultra-tight spreads with some going as low as 0.0 pips. This makes the cost of forex trading extremely low, especially compared to trading other financial instruments like stocks where traders are required to pay both a commission and the spread.

So is Forex a Good
Investment?

The following are some of the main characteristics of an investment.

  • The expectation of a return. This is the main objective of investing.

  • Inherent risk. Every investment comes with a portion of risk.

  • Liquidity. An investment should be easy to trade.

  • Stability of income.

When done right, forex can fit all these criteria, even the stability of income (losses are inevitable in trading but successful traders are able to make profits consistently).

Nonetheless, how good a forex investment is, comes down to having the stamina to go through all the learning and hard work that’s required to succeed.

Despite the forex market presenting a myriad of opportunities to potentially earn considerable returns, 95% of traders fail. The following are some mistakes that can take away from forex trading being a good investment.

Failing to do
Your Homework

Forex trading is easy to get into, but you still have to familiarise yourself with how it really works before jumping in. Learning how forex works is integral to a trader’s success right from the start. The majority of learning will come from trading and experience but you still need to understand the basic concepts of trading and formulate your trading goals.

For example, you have to understand the currency pairs you want to trade and learn the geopolitical and economic factors affecting those currencies. You’ll also have to understand how the forex market is analysed, how to identify opportunities in the market, and how to capitalise on those opportunities.

Failing to Protect Trading Capital

In addition to wiping away capital with excessive leverage, it’s also possible to lose capital by failing to employ robust risk and money management rules. There’s lots of focus on strategies to earn money with forex trading, but it’s also equally important to learn how to avoid losing the money you earn. For instance, you can make a winning trade but still fail if you don’t know when to exit the trade.

Proper risk and money management techniques are an important part of successful trading. You have to consider several factors including:

  • How you’ll use stop-losses and take profits to minimise losses and preserve your winnings.

  • How much of your capital you will risk in a single trade. For instance, many traders risk no more than 2% of their capital per trade.

  • How you’ll know when to accept losses and cut them before they compound. You can do this by determining your maximum daily loss amount beyond which all open positions are closed and no new trades are opened until the next trading session.

  • The risk/reward ratio you will use.

Having these rules and sticking to them even when the market moves against you instils discipline and minimises the risk of trading on emotions.

Ignoring the
Demo Account

Nearly all trading platforms come with a demo account that allows traders to place hypothetical trades without having to fund their accounts. Trading is a skill that gets better with practice and experience. The biggest benefit of practising in a demo account is that it builds skill, allowing a trader to become adept at trading techniques.

Ignoring the practice account and getting straight into live trading without an understanding of how trading platforms work puts your capital at risk, and chances are that you’ll lose it all before you earn anything.

Going Too Big
When You Migrate
to a Live Account

After practising on a demo account, it’s important to start small when you start live trading because no amount of practice can simulate real trading precisely.

You cannot fully appreciate factors like slippage (the difference between the expected trade price and the price at which the trade actually occurs) and the emotions relating to trading with real capital until you start trading live. Also, your winning strategy from your demo trading can fail when applied to a live market. By starting small, you can refine your strategy, gain more experience, and evaluate your emotions without risking a lot of capital.

Disregarding a
Trading Journal

Your trading strategy will evolve with market conditions and it will also change as you become more experienced and start using more capital. A trading journal is an effective way to follow your progression as things change, allowing you to learn from your losses and successes in trading. It can include things like profits, losses, and a description of your performance and your emotions.

When reviewed regularly, a trading journal provides vital feedback that makes learning possible. Without a journal and good record-keeping practices, you are likely to continue making the same mistakes, minimising your chances of succeeding in trading.

Failing to Learn
Continuously

The forex market is dynamic and there’s no definite formula for success. To stay on top of things, you need to make an ongoing effort to learn and be prepared to adapt to changing market conditions, world events, and regulations. Continuous education will help you to make reasoned decisions that support market trends during daily trading. In the long run, regularly improving your knowledge will help you succeed.

Making Forex
Trading a Good
Investment

It’s essential to treat forex trading as a business if it’s to become a good investment. Just like in business, you have to work hard, be patient, and have a sound strategy with realistic short-term and long-term goals. It’s also important to keep learning and to appreciate that losses are part of businesses. Your goal should be to consistently offset any of these losses with sizable gains. When approached as a business, forex trading can be a profitable and rewarding venture.

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