Is Forex Trading for You?

Forex or foreign exchange is a way you can invest your money. It works by taking advantage of the daily fluctuations between different currencies. When the forex market changes, the movement in points translates to dollars that you either make or lose, depending on your position.

You may be interested in investing in the forex market. However, it is not for everyone. It may look simple enough, but there are actually a number of social, political and economic factors at play that affect the value of a currency in a given day.

For example, during 9-11, the US dollar dropped to an all time low, although it later rebounded, only to drop again during the recession. As for the Japanese yen, it dropped several points immediately after the recent 8.9 earthquake and succeeding tsunami hit, only to rebound the following day.

Forex trading is more volatile compared to other investment options such as a mutual fund or investing in bonds. There is movement on a daily basis, so it needs to be constantly tracked or monitored. Also, because the economic markets are so closely interrelated, simple events have repercussions on a country’s currency, which has a domino effect on other currencies.

The forex market may be a good idea for you if you are willing to stay on top of your investment. If you’re the type of investor that prefers to sleep at night and simply look at your statements on a quarterly basis, this investment option may not be the best choice for you.

Assess you risk tolerance. If you are a conservative investor, this may not be the best investment option for you. After all, the currency markets can move dramatically in a space of a few hours. If you are willing to endure a bit of risk, you can easily make hundreds or even thousands of dollars a day in Forex trading, if you know what you are doing.

Also, you must have other investments other than forex trading. If this is your only investment vehicle, it may be a better idea to spread you risk and have other investments. Forex trading may be a part of your portfolio, but it shouldn’t be the only one in it.

Also, you must have enough money invested to be able to ride out drops in currencies, so you have enough time to recover your loss. While most responsible forex traders will set a stop gap loss, it’s better to have some cash at hand to be able to infuse your account as needed. If you have a limited amount of available cash, you may want to forgo investing in the forex market.

You need to educate yourself on the different terminologies on the trade, such as points, lots and so forth, to be able to manage and monitor your investment. Also, you need to stay on top of current events of various countries, since political and economic moves directly affect different currencies.

For example, if a specific currency is quickly devaluating due to economic or political events, then the central monetary board of the country may decide to intervene and infuse money into the system to stop a downward spiral. To be aware, watch the news and read the paper, not just for activities domestically, but stay on top of worldwide current events.

If you don’t know what you are doing, place your money elsewhere and find an investment scheme that is safer and more stable, such as a no-load mutual fund or buy stock in a blue chip company.

If you decide that you want to consider this as part of your investment portfolio, talk to a trader or a broker who can help set up an account for you. Research the company carefully, as there are many scam account managers out there. Be careful of off shore based forex fund managers or companies. Place your money only with established and reputable forex trading companies.