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Forex 101

 

What is Forex?
Forex trading is the buying and selling of currency for profit.  Forex or FX is short for foreign exchange.  The forex market allows people to bet that certain currencies will go up or down relative to other currencies.  So, for example, a person can bet that the Euro will go up relative to the Dollar and then make a profit if it does, just like betting a stock will go up.  You can do this with a variety of currencies including the Euro, the Japanese Yen, the Swiss Frank, etc. Perhaps one of the most appealing things about the forex market is that it’s open virtually 24/7.  It’s also very easy to open an internet account and start trading.  You can even try several free trading simulators to get an idea of what forex trading is like. 

 

Forex isn't necessarily a more risky trading vehicle
So now that we know what forex is, what is it not? There are some myths going around about forex...  For one, it’s supposedly very risky because of the leverage that can be involved. This is not really true. One unique thing about forex trading is that you can trade with up to 200:1 leverage, meaning with only 1 dollar you can control 200 dollars.  Certainly a person who is using 200:1 leverage can take on a lot of risk.  However, just as with any other sort of leverage, there is nothing requiring you to use it all.  You could just as easily use 5:1 leverage or no leverage at all.   Furthermore, some brokerages automatically liquidate your account before it goes below zero and guarantee you can’t be liable for any negative balance.  So with the combination of a floor on your losses, as well as not having to use extreme leverage, there’s really nothing necessarily more risky about forex trading.

Ways to Limit Losses
As a matter of fact, forex trading is in some ways less risky that trading stocks or futures, for example.  As previously mentioned, the forex market never closes, which means that you can avoid nasty overnight gaps which can occur in stocks.  It often happens that a stock owner enters a stop loss order, but overnight something happens, and then by the time the market opens again for trading, the stock has blown past the stop loss.  Because the forex market never closes, this is less likely to happen. 

More Advantages
What’s more, the forex market is the most liquid market in the world, which means you’ll never have a problem finding a buyer or seller.  That translates into less risk, particularly compared to thinly-traded stocks.  If you want to quickly get out of your position, you simply have to click your mouse.  On the other hand, if you’re trading a very illiquid stock or futures contract, you could have trouble finding a buyer and lose big.  And as a final note, almost all forex brokerages charge no commission and many have small or no account minimums.  This means you can get started without risking a large amount of money.

Making Money
With regard to making money, don’t let anyone tell you that forex is the magic pill.  It’s just like any other market- you have to do your homework in order to find a real edge.  Still, many people have found the unique attributes of forex to be very profitable and better than stocks.  Check it out, you might like it yourself.

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