Is It True That Forex Is a Bad Investment?

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You may have seen it written in some places that Forex is a bad investment. I’m not completely sure why anyone would say that except that it was something that they heard or that they simply have not had good fortune in trading the Forex market.

Forex is a bad investment only if you’re on the wrong side of the market movement. If you’re short in a bull market in your going to lose money and if you are long in a bear market you’re going to lose money. With this in mind it’s easy to see why some say that there no such thing as bad investments, just bad investors.

For those who are prepared the Forex market can be a marvelous investment. One reason why is that Forex currency pairs can trend quite beautifully. As we all know getting in on the long-term trend with excellent momentum can yield substantial profits. We must also keep in mind that there are number of currency pairs choose from so we have numerous opportunities to find trends within the various currency pairs.

Another reason that Forex can make such a tremendous investment is the leverage involved. It is possible to obtain leverage of 100 to 1. Essentially this means that relatively small movements within the Forex market can yield profits in large dollar amounts. Leverage is one of the principal things that attracts so many investors and traders to the Forex market. Properly used leverage simply translates into higher potential returns on investment. Quite naturally, it would be naïve to only mention returns on investment as leverage also plays a huge part in each individual traders and investors level of risk. Typically where there is increased possibility of profit there is also increased possibility of risk. Every successful Forex trader realizes this and places their trades accordingly.

So in essence you can see that the statement “Forex is a bad investment” is only true for some of the people some of the time. For those who have prepared themselves to profit for the long-term the Forex market is indeed full of outstanding investment opportunity.

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Some Key Differences Between The Stock Market And The Forex Market

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There are several reasons why forex trading, rather than trading in stocks, appeals to a lot of people. This is largely because trading in forex can be much more lucrative than trading in stocks. All an investor in forex has to do is to spot a favorable trend in the daily fluctuations in foreign currency, and have a system which will tell him when to start trading and when to quit. Another reason is that there is as much as a one hundred-fold leverage in forex, permitting the trader to make substantial profits with very little working capital.

A great advantage with forex is that the market is open throughout the day while the stock market works only during specific hours in a day. Further, trading in forex requires no commission to be paid to anyone, thus saving significantly on one s investment.

People who have some experience trading in stocks but none in forex trading tend to think that trading in foreign currency not only involves great risks but that the gains may be small or insignificant. They get this impression because compared to other types of trading there is not much information available on currency trading.

Forex traders need to educate themselves and get trained in the business, not just by looking at news items on currency values but by reading newsletters and finding ways to learn about the many ways to profitably trade forex. Being a huge market that is open day and night is a great advantage to a forex trader who can actually work all 24 hours of the day if he wants to, trading across time zones starting with Asia, through Europe and finishing up in America! If you link this with the leverage available in forex trading the chances of making huge profits are astounding.

Trading in the stock market is not without its own advantages. A person could invest in stocks without knowing too much about the business and yet do well. It is considered quite safe for a person to invest in blue chip stocks because they are known to hold their value well. You can do well investing in stocks if you are interested in long term equity growth. However, if you want quick returns for your investment, then forex trading is for you.

It is difficult to visualize the extent of the forex market. It is so huge that no single investor can monopolize the market, as could happen, and indeed has happened, in the stock market, or trading in precious metals and commodities. There are people who feel that forex is risky business. Pension funds are never invested in forex trading.

But if you get proper training and education in forex, you can make a lot of money in this market. Take the case of George Soros, the billionaire, for instance. He made a profit of two billion dollars when he shorted the British pound sterling! He has more than $ 4 billion under management, and takes in more than 60% profits in Quantum funds. Of course, he has a lot of money to invest. But he says that all he does is make huge profits when he can, and keep his losses to the minimum. He also confesses that he is wrong half the time, but does quite well when he is right. Soros studies the stock market of a given country and if current trend in its stock market has overshot its mark, he takes an opposite position and ends up making an enormous profit. When Wall Street crashed in October, 1987, Soros incurred a loss of $ 2 million. He said that the loss was due to an error in his judgment. He had expected the Japanese stock market to crash and was prepared to make a profit from the fall off in the US. But it was the American stock market that crashed. Soros works on the principle that one must pay for one s errors of judgment, but take in the profits when one can, and just keep going without agonizing over losses. Soros is a great example for how one could do well in forex trading, which is not without its risks. If only one would take the trouble to learn all about forex trading, train himself and be courageous enough to take some risks, he could be in a good position to make a great deal of money. But if you are afraid of incurring losses, then forex trading is not for you.

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Hedging In The Forex Market

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If someone wrote the word “hedging” on a paper and slapped in down in front of you, what would your immediate thought on the word be? Trimming the bushes is a likely first response, or maybe something similar to topiary. Obviously, you’re not very familiar with the Forex market. This is actually a trading term– unexpected, right? Hedging can be incredibly helpful if you’re about to enter the world of trading the forex market. Hedging in the market can be easily thought of as hedging a bush though, so you weren’t entirely off base. It’s trimming back on the risks, but building a wall of protection instead of cutting leaves from your money tree.

What is it?

The easiest way to explain hedging to the average person is to compare it to insurance, because when you’re risking something, you want insurance backing you up to feel secure in case the worst happens. It’s important to remember that just like an insurance representative won’t stand in front of you and take a bullet for you, hedging doesn’t entirely eliminate the risk. While that rep won’t protect you from a bullet, he’ll help you pay your medical bills once you get out of the hospital. It’s like that. You’ve still lost, but not as much as you could have if you were stuck with all those bills to take care of, plus a bunch of aches and pains. If you properly hedge before investing, you’ll cut the medical bills, but keep the aches and pains.

The best thing about learning to hedge is that anybody can do it. You don’t need a degree from Harvard to learn how to invest properly, and you certainly don’t need to be a rocket scientist to know you need to be careful when doing it. There are several different hedging techniques, all of which vary in degrees of knowledge of the market. But the most basic form of hedging is to place your money into two entire different things, like instead of investing in Smucker’s Jam and Jif Peanut Butter, go with the Jam but put in a motor oil too. This is still going to cost you money, don’t think of it as a way to make money and save money. Remember, like an insurance plan, you’re not saving money by paying it every month. But the good news is, if nobody wants peanut butter and jelly sandwiches this summer, you only lose a portion of your investment into the jam, but not in the motor oil. This is basic hedging. More complex hedging is done via derivatives, which is something only the most seasoned of investors go after.

Is There a Downside to Hedging?

As with all market investments and strategies, don’t expect easy choices and easy money. Everything comes at a cost, and hedging is no different. Before just investing in two random companies, do your research. Follow market trends, and if it’s definitely a good year for peanut butter and jelly, then there’s no need to invest in something else via hedging that will lose you money. This is counterproductive to the ultimate goal, which is of course to make money. You should also know, hedging is not intended to be a “get rich” scheme, and you will not make an enormous total sum by hedging in all of your trades. Remember this is intended as a bright side “well I didn’t lose it all,” method to offer some comfort when an investment goes totally south.

It’s also important to bring up that under all circumstances, your hedge will cost you money, and things don’t always go just as planned in terms of protection.

Should I Hedge?

For something that sounds so wonderful, it may seem surprising that through the entire career of some investors, they never hedge once. Playing the market is a way to make money through the long-term, and hedging protects mainly from short-term fluctuations, which if you’re learning the market, you’ll find aren’t as soul crushing as they seem to be. You could lose $400 one day, and gain $1400 the next, only to come out with a net profit of $1000. Hedging is a short-term insurance, so if that’s not your style, that doesn’t mean you should dismiss the concept entirely.

Hedging may not be for everybody, but it’s always good to know about as many market strategies as you can before you play the game. As with any investment risk you make, always remember to check into it fully, as nobody wants to invest in a sour lemon and lose everything. While hedging can save you money, it also costs you money, and sometimes can end up costing you the same as what you lost, and you’ll walk away with less profit than you started. Always make sure your investment choices are well-planned, and remember that you’re playing a game of strategy and luck when you trade.

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