Trading Forex: It Can Be Lucrative, But Understand The Risks

Forex trading can be a pretty lucrative business.

You have probably heard about some people making millions from trading forex. Because there is such high leverage involved, if a trade goes right, you can stand to make a lot of money. Do you think that the UK pound is going to collapse against the Canadian dollar? Or maybe you believe that the American dollar is about to rise about the Japanese yen? If you are right, you will make a lot of money on just one trade without a lot of money invested, which is why forex is so popular. The high amount of margin that you typically trade with makes it fairly addicting, as you can jump into the action with a lot amount of buying power very quickly.

For that same reason though, forex trading can be very dangerous as well. If you decide to utilize the full amount of margin in your account, and the trade goes 1% against you, you could have one half of your account wiped out overnight. Some brokers will offer you 0.5% margin requirements; so if you have $1000 in your account, you could conceivably trade $200,000 worth of currencies! You can see how trading forex could be potentially destructive to your portfolio if you guess wrong.

The good thing about trading forex is that the market is extremely liquid; trillions of dollars are traded every year, and you will never have any trouble getting in and out of your trades. Again, the downside is the high amount of margin that you can utilize.

My advice is that before you start trading forex, you should have a big enough portfolio where you don't need to use margin. This will keep your trading decisions much more clear and focused; if you are in over your head with margin, you tend to make irrational trading decisions.

Forex is probably the hardest method of trading, so you should be sure that you have a thorough understanding of the markets before you start to trade forex. I would recommend that you start off with the stock market, move up to trading options, and then tackle forex trading. The forex market has dusted off many amateurs who thought that they could run with the best on heavy margin. Don't end up another dead body on the road.

Filed under: Stock Market Education | General Knowledge