Is Forex Investing a Risky Business?

Sunday, February 6, 2011

Is Forex Investing a Risky Business?

Is forex as risky as everyone thinks? One way to measure risk is to compare a financial product's risk relative to its return. If you take the time to compare an investment in forex to common investments such as equities and fixed income, you will find that from a risk/reward standpoint, forex investments provide respectable returns and should be considered viable portfolio diversification tools.

The spot forex market is unique to any other market in the world, as trading is available 24-hours a day. Somewhere around the world, a financial center is open for business, and banks and other institutions exchange currencies, every hour of the day and night with generally only minor gaps on the weekend. Essentially foreign exchange markets follow the sun around the world, giving traders the flexibility of determining their trading day.

Although forex trading can lead to very profitable results, there are risks involved. When it comes to trading forex, you'll need to worry about exchange rate risks, interest rate risks, credit risks, and country risks - things you may not consider when trading stocks.

The foreign exchange market is unique in that central banks intervene from time to time to affect the price movements of their respective currencies. On the surface, this may disturb those who use fundamentals to make investment decisions, trusting that the "invisible hand" guiding free-market behavior is not being manipulated. However, it has been proven time and again that central banks can only influence currency values for short periods; over time, the markets adjust to the changes. This leads to the formation of trends, which your trend-following strategies will help you trade.

Since most currency trading is short-term in nature, speculators can cause erratic fluctuations in the exchange rates. So, when considering trading currencies, you cannot ignore fundamental factors. These include relative interest rates, economic stability, political stability, and relative trade deficit/surplus.

These fundamentals or market forces should be strong enough to initiate the formation of discernible trends in order for you to apply profitable technical trading strategies. Further, the length of the trends needs to be sufficient for you to recognize them and be able to take advantage of market swings.

Of the more than one trillion dollars a day transacted in the foreign exchange markets, an estimated 95% comes from speculative trading. While large international banks are responsible for the majority of this volume, there are retail investors all over the globe trading forex on a daily basis.

Without a doubt, investors in the US are behind the curve with regard to learning about and participating in this market. Active equity and futures traders who appreciate liquidity, strong technical indicators, and a multitude of short-term trading opportunities will find the forex market especially appealing.

But at the very least, trading the foreign exchange market deserves serious consideration as a diversification strategy in anyone's portfolio.

Source: http://www.articlecircle.com/ - Free Articles Directory

About the Author
Nofie Iman (http://nofieiman.com) is a full-time investor. He has been researching investment strategies and make his own living. You can learn more about his techniques at http://nofieiman.com/go/peter-bain/