Forex trading is coming into fashion with investors in 2015. Some of the appeal of currency exchange investing stems from high-tech improvements that allow easy access even for newbie investors. And some of the appeal comes from the potential forex trading market that does more than $3 trillion in daily volume, vs. less than $30 billion in a typical day for the NYSE.
And, of course, forex trading is high-octane and has many investors seeing dollar signs.
However, before you consider jumping into the currency exchange market, there are some key items that every investor should know. Here are five key forex trading tips:
Currency Investing Is Simple, But Not Easy: One of the appeals of forex trading is the idea that there are only a small number of global currencies to trade, vs. thousands of publicly traded stocks. But don’t confuse this simplicity with the idea that currency exchange investing is easy. This small list of currencies is tied to big-picture trends and often complex issues of geopolitics and central banking. That means it’s very difficult to be successful at forex trading without a good understanding of world events and the modern monetary system.
Movements Are Small, But Stakes Are Big: Movements in currencies are often quite small. In fact, movements of 1/100th of a percent, referred to as “pips,” are the common denomination of movement. That’s a far cry from stocks, where even a 1% move is not anything to sneeze at. But keep in mind that while movement in currency prices can be small, the standard lot size is 100,000 units of a currency — so a little goes a long way.
Leverage and Its Risks: Since standard lots are so large, that often requires traders to borrow to make trades of substantive size. After all, 100,000 units of a currency can quickly top $100,000 in total value for a single position. This kind of borrowing is called “leverage,” and can leave unwitting forex traders open to big risks if they make the wrong call. Trading with someone else’s money leaves little margin for error, so be aware of the risks that inherently come with trading large lots of currencies.
Trading Around the Clock: Currency trading is more accessible than ever before thanks to technological improvements, and that gives you access to the largest investing market in the world. But since foreign exchange is global, that means a 24-hour market that allows you (or in some cases, forces you) to trade around the clock. Some of the best forex traders are tied to their computers at odd hours, so make sure you know the commitment before you dive in.
Forex Trading Is Aggressive and Sophisticated: Personally, I would strongly advise all investors to consider forex a very aggressive asset class, and unnecessary part of the typical portfolio. Like penny stock investing or short selling or other high-risk strategies, you can make some serious money if you’re right … but the risks are huge if you’re wrong. The complicated nature of these approaches means that rookie traders can get eaten alive, so only veteran traders with nerves of steel should consider playing the currency exchange market at any scale.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
