Foreign Exchange Risk

There is confusion about the risks involved in currency trading. Much has been said about the interbank market being regulated and therefore very risky due to lack of supervision. This perception is not entirely true, however. A better approach to risk analysis would be to understand the differences between a decentralized market versus a centralized market and then determine that regulation would be appropriate.

The interbank market consists of many banks trading each other around the world. The banks themselves determine and accept sovereign risk and credit risk and for this have much internal audit processes to keep them as safe as possible. The regulations were imposed-industry for the good and protection of each participating bank.

Since the market is made by each of the participating banks that provide offers and offers for a particular currency, the mechanism of market pricing is reached through supply and demand. Due to huge flows within the system it is almost impossible for an unscrupulous trader to influence the price of a currency and indeed in today's high volume market with between two and three trillion dollars being traded per day, Even central banks can not move the market for any period of time without full coordination and cooperation from other central banks. (For more information on the interbank, read the interbank foreign exchange market)

Efforts are being made to create an ECN (Electronic Communication Network) to make buyers and sellers in a centralized exchange so that pricing can be more transparent. This is a positive move for retailers who will make a profit by seeing more competitive prices and centralized liquidity. Banks, of course, do not have this problem and can, therefore, remain decentralized. Traders with direct access to forex banks are also less exposed than retail traders who deal with relatively small and unregulated currency brokers, who can and sometimes even re-quote prices and trade against Of its own customers. It seems that the discussion of regulation has arisen because of the need to protect the unsophisticated retail trader who has been led to believe that forex trading is a safe profit scheme.

By the serious and somewhat educated retail trader, there is now the possibility of opening accounts at many of the major banks or the largest liquid brokers. As with any financial investment, it is worth remembering the caveat.emptor rule - "the buyer beware" (For more information on REC and other exchanges, visit Knowing stock exchanges.)

Forex Pros and Cons

If you intend to trade with forex, and consider the above comments about intermediate risk, the pros and cons of forex trading are set as follows:

1. Foreign exchange markets are the largest in terms of volume traded in the world and therefore offer the highest liquidity, making it easy to enter and exit a position in any of the currencies within a fraction of a second.

2. As a result of the liquidity and ease with which a trader can enter or exit a trade, bank or broker forex terpercaya and offer great leverage, which means that an operator can control fairly large positions with relatively little money of his own. The rules of the game in the 100: 1 range are not uncommon. Of course, a trader must understand the use of leverage and the risks that leverage can impose on an account. The rules of the game have to be used with caution and caution if it is to provide some benefit. Lack of understanding or wisdom in this regard can easily wipe out a merchant's account.

3. Another advantage of forex markets is the fact that you trade for 24 hours throughout the day, starting every day in Australia and ending up in New York. The main centers are Sydney, Hong Kong, Singapore, Tokyo, Frankfurt, Paris, London and New York.

4. The foreign exchange market is a "macroeconomic" effort. A currency trader needs to have a great understanding of the economies of different countries and their interconnection in order to understand the fundamentals that drive currency values. For some, it is easier to focus on economic activity to make business decisions than to understand the nuances and often closed environments that exist in the stock and futures markets where micro economic activities need to be understood. Questions about a company's management skills, financial strengths, market opportunities and industry-specific knowledge is not required in Forex trading.

Two ways to get closer to the currency markets

For most investors or traders with experience in the stock market, it has to be attitude ashift to transition into or to add coins as a new opportunity for diversification.

1. Currency trading has been promoted as an "active trader" opportunity. This fits the brokers as it means they gain more widespread when the trader is more active.

2. Forex trading is also promoted as trading leverage and therefore it is easier for a trader to open an account with a small amount of money that is necessary for the trading stock.

In addition to trading for a profit or performance, the currency trading can be used to hedge a portfolio of securities. If, for example, you build a portfolio of securities in a country where there is the possibility of action to increase value but there is no downside risk in terms of the currency, for example, in the US. In recent history, then an operator could own the securities portfolio and short sell the dollar against the Swiss franc or the euro. In this way the value of the portfolio will increase and the negative effect of the fall of the dollar will be offset. This is true for investors outside the US. Which eventually repatriate the profits to their own currencies. (For a better understanding of risk, read Understanding the management of exchange risk.)

With this profile in mind, opening a currency account and trading day or swing trading is more common. Traders can try to make extra money using the methods and approaches elucidated in many of the articles found elsewhere on this site and on brokers or banks websites.

A second approach to the forex market is to understand the fundamentals and long term benefits when a currency is in trend in a specific direction and is offering a positive differential interest that offers a return on investment plus a appreciation of value the coin. This type of trade is known as "carry trade". For example, a trader may buy the Australian dollar against the Japanese yen. Since Japan's interest rate is 0.05% and Australia's latest interest rate is 4.75%, a trader can earn 4% of its trade. (For more information, read the fundamentals of the Fundamentals currency).

However, such a positive interest has to be seen in the context of the AUD / JPY real exchange rate before a decision of interest can be made. If the Australian dollar is strengthening against the yen, then it is appropriate to buy the AUD / JPY and hold it in order to gain both the appreciation of the currency and the yield of interest.

Bottom line

For most traders, especially those with limited funds, day trading or swing trading for a few days at a time can be a good way to play forex markets. For those with longer horizons and larger pool bottoms, a forex trading may be an appropriate alternative.

In both cases, the trader must know how to use tables to measure the time of their trades, since good weather is the essence of profitable trading. And in both cases, and in all other trading activities, the trader must know his own personality traits well enough so that he or she does not violate good trading habits with bad and impulsive behavior patterns. Let logic and good common sense prevail. Remember the old French proverb, "Fortune favors well-prepared mind!" (To determine what type of trade is best for you, see what kind of forex trader are you?)

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