Forex trading has increased over the last few years. One reason for this is because of the rise of exposure to investors who now have more information at their fingertips than ever before.
The internet is largely responsible for the surge of investing information. It has shown the regular investor alternatives to grow wealth that were either unknown or simply unused previously.
What this means for Forex, short for the foreign exchange market, is that average people can invest in currencies previously traded mostly by large companies. But the question is, should you invest in forex?
1. Trades are on Paper Only
Trading of Forex is not regulated like futures or stocks. There is no governing body or clearing house to oversee trades or settle disagreements. Those who choose to trade Forex do it on agreements that are basically on paper only and recorded as computer transactions on the trader’s account.
Both parties have to agree to the exchange. What keeps them honest? Each should be a member of the National Futures Association, or NFA, which includes binding arbitration to help settle any disagreements. Those who even consider trading currencies should only do it through a firm who is a member of the NFA.
Trading takes place from 5 pm Eastern Standard Time on Sundays to 4 pm Eastern Standard Time on Friday and almost never has price gaps. In addition, there is really no such thing as insider trading. If you have a tip about a change in currency you can act on it without fear of repercussion.
2. No Commissions
With trading being done on paper only, there are no commissions in Forex trading. Dealers, not brokers, take on the risk in the trade and make money through the bid-ask spread. All gains are profits for the investor after the price clears the cost of the spread. However, scalping by dealers is rare and very difficult due to the nature of the trade.
If trades are done on paper only with no commissions you may wonder why you should trade. One reason is because gains, or losses, made through the trade allow you to diversify your investments.
For example, if you feel the value of the U.S. dollar will drop you can trade for another currency that may rise instead. Some people fear that the dollar’s value will drop so they would prefer to have some currency of other another country whose currency is strong.
As the currency of another nation appreciates in value, your investment in that currency grows. Once you trade it again you will have made a profit.
Of course, there is risk that the value could also drop leaving you with a loss instead. This is why having an understanding of world events and their impacts on currency can be critical to trading Forex.
Newcomers to trading may find it a risky investment if they do not have knowledge of currency values. But if you are new to trading, try a virtual investment in Forex to get familiar with it before investing real money.
In the end, due to the volatility of some values of currency, Forex trading is mostly done by experts or those who understand the currency market.
Have you ever invested in Forex and if so, were you successful?