Compared to other capital market investments, foreign exchange trading risk is a different animal. In most stock markets, for instance, you have a relatively high correlation between the health of the economy and the prices of the stocks being traded. Forex, on the other hand, is global and has almost no strong correlation with any national economy. In most bond markets, for example, you have a relatively high pricing correlation with central bank monetary policy changes. In forex, there is some of this going on, but only as it relates to specific national currency pairs – not those of other countries. In most real estate markets, you have a relatively high negative correlation between asset prices and interest rate increases. In foreign exchange, however, the correlation is positive.
Experienced foreign exchange traders may wish to trade the AUD only on Tuesday, Wednesday and Thursday mornings, when liquidity conditions are optimal and pricing is relatively tight. Newbies should fire up their “demo accounts” with foreign exchange trading in such relatively mellow pairs as the AUD/CAD or EUR/CHF.
How Risky Is Foreign Exchange For Traders?
Most forex investors leverage their trades. This puts their overall investment risk on a par with any leveraged stock or futures trade. However, if such an investment is leveraged more highly than what is traditionally the case in the stock market or the futures market, then such an investment must be considered “very risky” in comparison. There are ways to mitigate such risk. For example, no one is going to force you to use a high leverage ratio. You can use 10:1, instead. Similarly, you can trade well known, relatively docile pairs (e. g., EUR/CHF or AUD/CAD), instead of acrobatic types (e. g., AUD/NZD or NZD/JPY) or hedge (e. g., going short EUR/CHF while going long EUR/USD, at the same time).
Is Foreign Exchange Trading Always Worth The Risk?
Investing in forex is very similar to investing in any other investment category. There are going to be days when such an idea looks fantastic and there are going to be days when such an idea looks incredibly boring. Where forex diverges from other asset classes is how global and non-stop it is plus the fact that you can leverage your cash many times over what is traditionally allowed in most stock, bond and futures markets. As part of a well-diversified portfolio, forex is to be recommended. It’s extremely flexible, in terms of time duration, and offers excellent hedging opportunities. In addition, in comparison to other markets, initial investment thresholds are relatively low and trade execution costs are fairly minimal.
Getting The Most Out Of Trading Foreign Exchange
An opportunistic trader (particularly one specialising in the AUD) would only trade during the mornings of Tuesdays, Wednesdays and Thursdays. This is when trade volumes in Sydney are at their highest and trade executions should be excellent. If you have the stamina, this could be followed by an evening trading session, involving the EUR/AUD, as London begins to open up (and funding flows increase across the board). Of course, not everyone wants to be a day trader. However, the positive interest rate carry situation of the AUD precludes long-term shorts and the 2013 outlook for any long-term, AUD-related, long trading positions is cloudy. More public information about when Australia’s massive LNG export projects are coming online is needed.
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