Between 5 p.m. EST Sunday and 4 p.m. EST Friday, there are millions of Forex traders around the world trying to make a profit by predicting the future movement of currency exchange rates. With nearly 1.8 trillion dollars changing hands each and every day, the Forex is the largest and most fluid market in the world. Traded 24-hours a day and with investors having instant access to price changes via an Internet station, it is literally possible to watch one’s fortunes ebb and flow-one pip at a time!
A pip is equal to the smallest price increment that any currency can make. For the U.S. dollar and most major currencies, that amounts to 0.0001 (0.01 for the Japanese Yen). While it seems near impossible to make any money when dealing with such small numbers, the standard transaction unit on the Forex is $100,000 and is called a lot. Thus, the movement of just a few pips in either direction can turn into big profits or big losses-real fast!
In truth, playing the Forex is much safer than heading into a casino because the odds are not automatically stacked against you-but you can still lose your shirt if you over trade. Just like professional gamblers will tell you that playing against the casinos is a losing proposition-professional and successful Forex traders know that trading too often is simply stacking the odds against them.
For whatever reason, most of us are simply not going to risk $100,000 of our own money on something as volatile as the Forex. This is why the margin is such an important factor when thinking about buying and selling positions. Typically, an investor would need to put up $1,000 of their own money to buy a lot, or 1/100 of the total. Leveraging a position may be a practical necessity but it also means that the average investor is more at risk when it comes to price fluctuations. The more leveraged the position, the greater it will be affected by pip movements-up or down.
Making a profit in the Forex market boils down to knowing when to enter and exit a position-period. Investors place stops on orders to help limit losses and they need to rely on those stops to prevent them from losing too much-or bailing too soon! Investors who track the market every minute of the day and constantly monitor their positions are not only more likely to go crazy-they are also more likely to bail when the price starts to dip. So long as you have stops in place and are sticking with your investing strategy-be patient! At most, check the market at the close of each day and just hold to your strategy until the charts indicate otherwise.
It is difficult-almost impossible-not to worry about your investments so the natural impulse is to monitor them closely. However, the time to do your homework and put in the time is before acquiring a position-not after. Backtesting will help you find the best currency pairs for your investment tastes. Once you have the stops in place, check the charts and market once a day and let the investment ride. Losses are part of the game and your stops should protect you from losing more than you are comfortable with. Forex can make you a lot of money with moderate risk but it will become like a casino and the odds will turn against you if you play too often!