Theory Of Economic Cycle

Can I Be A Successful Forex Trader ?

Forex trading activity is highly risky in nature. Therefore, the Forex traders and investors are advised to attain a certain level of knowledge and follow professional advice on Forex trading or investing.

Let us study the factors that make Forex Trading a high risk activity ;

* Volatility : Unlike stocks or bonds, Forex deals are done globally, 24/7, round the clock.

* Import and Export influence the prices : Let us have a closer look at Forex trading. Forex rates are not quoted for the purpose of trading only, unlike securities, but they are determined by actual buying and selling of currencies from international trades, for example oil. When a country exports oil, the currency needs to be converted from importer ( buying country - importer) currency to exporter currency (selling country - exporter).

* Investment Pattern : If interest rate is going higher of any particular economy, investments inflows in to that particular country increases, as the yield on securities increases, which in turn makes the currency rate of that economy more volatile.

* Service Industries such as tourism, airlines, fund transfer, banks etc. add to the volume of trading currencies. All these combined factors lead to high volumes and make currency volatile.

Currency trading has an approximate volume of 1.9 trillion dollars a day, which makes it an efficient and liquiid instrument of trade.

Leverage : Rate Fluctuation. Currency is always traded in pairs and usually, at the most, the fluctuation is only 15% a year in a volatile pair. The question would be that, With an average 15% p.a. volatility in a currency pair, why is Forex Trading more riskier than securities?The reason would be, the currency is an efficient instrument and it has liquidity in itself. The result is that, the leverage available for trade in currency is 1:100 approximately, whereas that of securities is hardly 50% to 70%. This factor of less margin due to high leverage encourages humongous volume. Due to high volume, fluctuation of one cent on one lot ($100,000) leads to profit/loss of $1000, approximately. This could happen in seconds!

Result : Even though currencies are supported by the government , the risk is the highest in almost all trading activities globally.

Conclusion : The essential factor to limit risk from the losses which may incur due to volatility in trading is, to keep a Stop Loss Order.

Stop Loss Order (or Stop) : An order to buy or sell when a particular price is reached, either above or below the price that prevailed when the order was given.