Online Forex Trading is enjoying exponential growth and widespread acceptance. It is now gaining popularity among seasoned active traders and other professional money mangers. Large international banks used to dominate the forex market while allowing access via telephone trading to a select few such as high-net worth individuals. However, things have changed with the coming on stream of established online trading firms. These firms provide individual investors with direct access to the largest and most liquid financial market in the world.
Is Forex Trading a Risky Business?
Risk can be measured by comparing a financial products risk relative to its return on investment. When you compare investment in forex with other common investments like equities; you will realize that forex investments provide better returns from a risk/reward basis. An investment in a basket of major currencies (or USD/JPY) last year was comparable to 30-year bond futures (which was one of the best returns for the fixed income markets in years), and clearly outpaced the negative returns generated by the DJIA. Forex trading can lead to very profitable results but there are also risks involved. When it comes to trading forex, you’ll need to worry about exchange rate risks, interest rate risks, credit risks, and country risks — things you may not consider when trading stocks.
TREND IN FOREX
Approximately 80% of all currency transactions last a period of seven days or less, while more than 40% last fewer than two days. As a result of this extremely short lifespan of the typical trade, technical indicators heavily influence entry, exit, and order placement decisions.
Approximately 85% of all daily forex transactions involve “the majors.” These include the US dollar, euro, British pound, yen, Swiss franc, Canadian dollar, and Australian dollar. The depth and concentration of the market in just seven currencies provides a statistically significant dataset for trend analysis. Technical indicators work the same way on the currency markets as they do on the equity markets.
The Short-Term Nature of Forex
Central banks intervene from time to time to affect the price movements of their respective currencies. This makes the forex market unique. For instance, the Bank of Japan once pushed down the value of the yen). On the surface, this may disturb those who use fundamentals to make investment decisions, trusting that the “invisible hand” guiding free-market behavior is not being manipulated. However, the influence of central banks can only affect currency values for short periods; over time, the markets adjust to the changes. This leads to the formation of trends, which your trend-following strategies will help you trade. Since most currency trading is short-term in nature, speculators can cause erratic fluctuations in the exchange rates.
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