forex for dummies

Trading forex comes down to risk management. If a forex trader takes a position in a currency, and sits on it for 3 months, while he may profit, he is exposed to the same kind of risk as if he were not trading. In other words, during that 3 month period, many things can happen to make that position open to risk. Utilizing stop losses, and actively trading, is in itself a risk management policy, rather than a strategy of knowing where the market will go. For a forex trader, the risk management side is inherently more important than guessing which direction the market will go.

It is those funds and forex traders, who are maxed to the hilt with high margins, with no stop losses, that expose their clients to the huge risks in the forex markets. Consider purchasing 100k EUR/USD at 1.2020 expecting a rise to 1.2100 (with a stop at 1.2000). If you are trading 100,000, you have taken a 100% cash position. If the EUR/USD goes as expected, you would make a profit of $800, or .8%. If it goes against you, you would lose $200, or .2%. So you are risking .2% to gain .8%. What many traders might do is take a 1,000k (1 million) position, which is 10:1 margin. This increases your P/L by 10 x - so that .2% loss is 2%, and the .8% gain is 8%. This is where risk comes into the forex market. So, it is not the forex market itself, or forex trading itself, that is risky, but rather, the risk management policy of forex dealers. Good dealers will first have a solid risk management policy, and second, develop a trading strategy.

Finally, during volatile times, or if a trader just wants to have a go at making 100 points, it is possible to take a less than 100% cash position, totally limiting the risk of loss. Using the example above, where you have 100,000 in your account, it is possible to trade 10k lots instead of 100k lots, putting you in a position of only 10% cash, or negative margin. This means the above trade loss goes from .2% to .02% - as well, your gains are also limited to .08% instead of .8%. However during certain volatile times trying to make a small profit may be better than exposing funds to potential losses.

Forex trading allows for a great degree of risk management not available in other capital markets. Margin, being able to buy or sell without limit, high liquidity (2.3 trillion traded daily), and a 24/6 market, give only the forex market to be so flexible regarding risk. In other words it is not possible to have such a sophisticated risk management policy in other markets.

• Buy OR sell (compared to stocks where you can not always go short)
• Always find a buyer or seller (the forex market is the only real liquid market in the world. It is impossible you want to trade and cannot find a buyer or seller)
• Use high margin, or trade conservatively
• Take opposite positions at the same time
• Take multiple positions (instead of selling EUR/USD, take multiple EUR positions against the crosses such as EUR/GBP, EUR/CHF, as a hedge against your first EUR/USD position)

The above factors are the real opportunities in the forex market, not the potential to make 100% that exist in other markets such as the stock market.