Why Should You Go Into Forex Trading?

When it comes to trading or investment, there are a few ways to go about it. One way is by Forex trading. Other ways include trading in stocks, futures and options. Each of them has their own advantages and disadvantages.

One advantage of trading Forex is that you can trade Forex 24 hours a day, 5 days a week, from Monday to Friday. It just means that the market opens on Monday morning and stays open till Friday evening. When you enter a trade, you do not have to worry about not being able to exit your trade as long as it is before market close on Friday evening. With these long hours, it allows investors and traders alike, to trade during their free time or after their working hours. This is one of the reasons why a lot of traders prefer and choose Forex trading. It is due to Forex trading having one of the longest trading hours.

Another advantage of Forex trading is that it is very liquid. There is always strong demand and supply from both the buyers and the sellers on either side of the trade. Central banks, domestic banks and funds are in the Forex market as well. This ensures that you are able to get in or out of your trade at any given time.

If you like volatile markets, this market is one of the most volatile markets you can find. Within hours, it can go up or down a few pips to a few hundred pips. And this is very normal in Forex trading. Due to its volatile nature, many traders like Forex trading. The reason behind this is simple. The Forex trader can enter a trade at any given time and expect to profit from his or her trade within hours if not minutes.

In Forex trading, high leverage is always the case for all Forex traders. And this is why most traders like about Forex trading. The amount of leverage usually depends on the Forex broker or brokerage. Usually, it ranges from a leverage of 10 times to 100 times. And sometimes even more. And because of the high leverage, a small amount of capital is use. This is to yield very high returns. You can easily find a brokerage or broker that is willing to accept a minimum of $100 to $2000 to start your trading account.

Last but not least, brokerages offer mini or even micro contracts. This allows those with very low capital to trade in this market. Typically, for a mini contract, 1 pip is around $1, and for micro contracts, 1 pip is $0.10. Meaning let say if you buy a micro contract, and it goes 100 pips against you and you decide to exit and take the losses, you will only lose $10.

Whether you are into Forex trading or not, finding the winning formula or system with the right trading plan is always on every trader’s mind. Like other markets, it is possible to use fundamental or technical analysis (or both) to trade Forex and still profit from it.

When Offshore Carry Trade Fail

Carry trade is the most popular strategy in the foreign currency exchange market for the past decade. This involves buying currencies yielding high interest and selling currencies that yields low interest rates.

It is important to choose the best pair of currency as this could mean gaining or losing. Usually, high yield currencies are New Zealand and Australian dollars. And the low yield currencies would mostly be the Japanese Yen (U.S. dollar can be used but it’s high volatility does not make it the best candidate). Profit will be gained out of this strategy by its ability to earn interest. Investors on long carry trades get profit counted daily, except on Wednesdays where a triple rollover is necessary to cover Saturday and Sunday rolls. For those who are fading their currencies (short carry trades), interest is paid daily.

Forex market trading is a long-term strategy that suits investors more than traders, because investors will be too happy in checking on the international market rates about twice or thrice a week than several times a day. The very foundation of the this specific game is to get paid while you wait, so waiting is actually a good thing.

When does it fail?

1. Central Bank Reduces Interest Rates. When there’s a significant drop in the interest rate of your high yield currency, as in the case of the country’s economic crisis, the gain stops and losses will be apparent. That is why it is important to choose a pair of currencies that either appreciate, or stays the same. Further on, traders will look elsewhere to put on their money as it is risky to invest in a declining currency, leading to lesser demand for the currency pair and eventually, a sell off. In this instance, leverage that could bring exponential gains can also bring exponential losses.

2. Central Bank Interferes with Forex. Foreign currency trading will also fail should central bank mediate and stop its currency from appreciating or to negotiate to prevent its currency to drop further. Now, you might be wondering in what cases would Central Bank hinder a rise in its currency. That’s because for export dependent countries, a very strong currency would hurt the export industry. For example, if the New Zealand dollar gets too strong, its Central Bank would have to suppress the currency’s growth, and thus affect the profit that traders and investors are after.

Knowing that what could fill your pocket could also bite you, means that you have to establish a delicate balance between risking and safeguarding your wealth. To most big time investors, this means neutralizing the risks by multiple investments. In their “basket” would be three highest and three lowest yielding currencies. That way, one currency pair’s loss could still be covered by the other two investments. The downside of course, would be the fact that this will involve enormous amounts of money. But then again, for multi-million dollar, risk-taking investors, it’s truly best to be safe than sorry.

Carry Trading As A Forex Trading Strategy – Does It Really Work?

Carry trading in foreign exchange and investments refers to the practice of investors, speculators and carry traders taking advantage of and utilizing the opportunity to invest of the interest rate differences in two or more countries; they buy or borrow currency from the low interest rate country and invest it at the high interest rate country. By doing this, they get profits of their trade or investment.

Carry trading is a highly risky business which is rewarding to the investor or carry trader. First, the business is dependent upon the interest rates which are not necessarily determined or influenced by the market forces, but by the government through the central bank. Monetary policies and actions by the central bank may positively or negatively affect carry trade.

Central banks act to maintain the value, to revalue or devalue the country’s currency, deal with inflation to stabilize prices and may also act to either increase or decrease the commercial and other financial lending interest rates. This may cause the exchange rates between the currencies of two countries to fluctuate often. Carry traders who engage in this business must be ready to accept this real risk. Carry trade business may lead to losses if a central bank drastically reduces the interest rates. It may also be highly profitable and enable the investor or carry trader make super normal profits when the central bank acts to increase the interest rates.

Selection of a currency pair is very important and vital in carry trading; in fact, the amount of profits an investor or carry trader makes depends on his or her currency pair combination. Normally, anyone engaged in this trade should buy the high interest rate currency and sell the low interest rate currency. Usually, stronger economies have stronger currencies and carry traders will buy the currency with the stronger economy and selling it through the weaker economy. A good combination which may be profitable to a carry trader may be Great Britain, Pound and Swiss Franc currency pair or a United States dollar and Japanese Yen currency pair.

Carry trade is also dependent upon the currency liquidity rate. A currency with higher liquidity rate will be far much profitable to combine with a currency which has lower liquidity rate level. Those carrying on carry trade should inquire about the volatility and economic stability of the country they want to invest or carry trade in. Volatility is the uncertainty about the level of prices and interest rates and may be caused by natural calamities like droughts and earth quakes or wars and civil strife.

Whenever an economy turns volatile, foreign investors and traders will usually leave and avoid investing there. This will negatively affect investment in and eventually the currency value of the volatile economy. Carry trading in volatile economies is not good and may lead to huge financial losses.