Investing

The Dangers of Forex Investing

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A post looking at the pros and cons of forex trading and what you need to look out for to keep your portfolio safe from the pitfalls of the foreign exchange market

A few months ago, I had a guest post on my site about trading the forex market, and I had a comment requesting how I should talk about the dangers of forex investing.  So because I am responsive (albeit slowly responsive, sorry!), here’s my post on the Dangers of Forex Investing.

Bear with me here, as I don’t know very much about forex investing as I personally haven’t included this type of investing in my Questrade portfolio.  Well, I guess except for some USD/CAD that I buy when the CAD dollar is up.  But it’s more for my personal spending when I go to the United States.

First let’s explain what Forex Trading is:

Forex stands for Foreign Currency Exchange.  Basically it’s the trading of the world currencies.  You buy a world currency, hold it for a period of time, and expect/ hope that it will rise in value.  When (or if) that happens, you sell it.  It sounds quite similar to buying and selling equities.  Except that it can be much more risky than trading with the conventional stock market.  Here are some qualities of the Forex market that makes it dangerous.

Qualities of the Forex market that make it dangerous for your wallet:

  • It’s open 24 hours of the day (more opportunity for you to lose money) except weekends
  • Many investors agree that this market is (very much so) based on speculation
  • The forex market can be largely affected by world news, politics, or anything that happens in the world (super volatile)
  • It is very technical and you will need to know the trading vocabulary before you even start
  • You will have to pay fees for any profits that you incur, as well as trading fees and commissions (the brokerages make money even when you lose money- they don’t really care)
  • Often the brokers will encourage you to leverage (borrowing money to make money aka “trading on margin”) and if you seal a wrong deal, you’re pretty much instantaneously screwed… big time
  • When you are encouraged to leverage, it can be huge (like for every $1 you have, you can borrow $100)
  • Large volume, high liquidity- this can be good or bad I suppose

There’s lots of forex day trading brokerages popping up these days, especially with it being so easy to do online.  Just be careful and make sure you don’t go head over heels and find yourself in investing debt =( If you are still interested in trading on the Forex Market, you should try a Forex Market simulator first (use fake money).  Also, I hear that they have Forex Robots that use algorithms to make the currency trades automatically, which might help take the panicky psychology behind currency trades, and help limit your losses.  Don’t be lured into “MAKE BIG MONEY FAST” gimmicks from the Forex Market.

Readers, have you invested or traded with the Forex Market? What are you thoughts on it?



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