The Forex market is certainly the biggest market in the world in terms of trades, liquidity as well as total value. There are literally trillions of dollars at play every day. Till a few years back, this market was not open to everyone, trades happened only through major banks and clearing houses and this kept a lot of prospective investors out of the market. The Internet of Things changed all that and it is now open for any person to set up an online account and trade from the comfort of their homes.
How Much Money You Should Risk at the Beginning
Since there is no physical market present, it can happen from anywhere between any two parties as long as they are willing to trade. There is also no set governance nor are there any regulations put in place and this has been advantageous to the market. Self-governance among traders has made the market highly competitive and tight, making the market work as there is no arbitration body, those who do not keep to the market standards will naturally lose out.
The inherent risks involved
The mere description of the market makes it look too good to be true, but the catch to all this is that the risks are just as astronomical as the returns. Forex markets are highly volatile in nature, thanks to the value of currencies dependent on so many outside and inside factors, as well as the value of the currency it is paired with. Also, since there is no regulatory authority to govern the market, if a trader has information that the government is planning some monetary measures that will make the currency rarer, the investor can hoard cash and there is no one to question. In other words, there is rampant insider trading, in fact inside information is more of a strategy than a crime.
Many analysts and traders liken the Forex market to nothing more than a gamble and in many ways, it is. It is almost impossible to accurately predict the outcome of a trade and even experienced players in the market regularly lose money. Before getting into the Forex frenzy, it would be wise to know that over 70% of all trades do not reap profits.
How to invest
Currency trading is generally done in pairs. A currency pair is how currencies get valuation and are most often paired with the USD. So, if a trader wishes to trade in Japanese Yen (JPY), it will be denoted by USD/JPY where USD is the base currency and JPY is the quote currency. The value for this pair will be denoted numerically with four decimal points. By this, on April 1, 2014, the value of JPY was 103.6336 and April 2 had 104.1667. These everyday changes are the basis of trade in the Forex market. On this concept there are Forwards, Options, Futures, Spots and Swaps that are used as instruments in the market.
How much to invest
There are no upper limits or lower limits to investing in the market and this may cause a lot of investors to be attracted by the market and invest a lot of money. The returns, owing to the volatility of the market are high, drawing a good number of risk loving investors, but reports have shown that nearly 90% of first time investors lose money. So much money that it has the potential to wipe out entire savings. Forex investments are the slot machines of the money market casino.
A good way to start will be 2% of the investment basket. This will prepare and give a taste of what is to be had or lost in the market. If that is too low, never go for more than 5% to 10% of the total account. There is a need for technical analysis of the market and investors, especially those with a low tolerance in terms of monetary losses should study and learn the ins and outs of the market as thoroughly as possible. Over trading is the first and biggest mistake novice traders and common investors make. The next step is to create a stop loss position so that the trade closes automatically if the losses fall below a certain low point.