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Currency trading is quite popular nowadays. There are television programs, websites, and advertisements all decrying the benefits of currency trading. The Forex market is the largest market in the world. It’s estimated that $2 trillion dollars are traded in the currency market everyday. Trading involves the purchase and sale of large quantities of currency to leverage the shifts in currency. It may sound complicated but it can be easily understood by taking a closer look.
Let’s take a look at the pros and cons of currency trading.
Currency trading involves buying one currency and selling another. Currencies are traded in pairs. An investor has to get long one currency and short another currency. For example, let’s say you were bullish on the dollar. You would buy the dollar and short the eurodollar. If the dollar went up against the euro, then you would make money. If the dollar declined against the euro, then you would lose money.
Currency trading is all about the PIP’s. A PIP is a point in percentage. One pip is the smallest incremental trade that can be made. Currency trading does not charge commissions. Instead there is a bid/ask spread in currency trading. This spread is the difference between the price that a trader can buy at and a trader can sell at.
Advantages of Currency Trading for Short Term Investing
It’s a great way to make some quick money. Currency movements can be very volatile. Investors can make quite a bit of money in a short amount of time. Technical traders can make hundreds or thousands of dollars in a couple minutes. George Soros made $1 billion dollars by making a correct bet currency trading.
Another advantage is that you can make money just about anytime. The stock market is only open from 9:30 AM to 4:00 PM. Even the extended hour market doesn’t open until 8:00 AM and closes at 8:00 PM. The currency market is open 24 hours a day, 5 days a week. Traders can trade from the comfort of their own home day and night.
Disadvantages of Currency Trading for Short Term Investing
As any good investor knows, it is virtually impossible to time a market. Currency trading involves knowing the right moment to get in and out of a currency. Currencies move largely due to speculation. Traders never know when large firms or corporations are driving up the price of a currency. All of your charts and data can point to a currency doing one thing but a speculator can make the exact opposite occur.
Currency traders rely heavily on leverage to make money which means currency trading can lose you money just as quickly as it makes it. Some firms allow 500:1 and 100:1. Many currency traders have horror stories of losing all of their money due to one bad trade. Traders have to constantly watch the market because one bad move can cost you everything. The bid/ask spread means that traders always start in the red when trading.
Currency trading is not for the faint of heart. It can be a great thrill watching your account balance surge and it can be a depressing ride watching your balance plummet. Currency traders should never risk more than they can afford to lose. Traders have to be careful not to fall into the traps on constantly daytrading. Since the market never closes, currency trading can be addictive. Despite all of the pitfalls, traders that do their homework and properly manage their risk may find currency trading a worthwhile endeavor.