Retail Forex Trading
Retail forex trading has come of age in a very short period of time. At one time, the investment vehicle of choice for a wealthy investor was a forward contract that promised to deliver a foreign currency at a fixed price at a fixed date in the future.
If the currency appreciated based on anticipated economic fundamentals, then the investor was a happy man. This form of carry trade was already popular with large global banks, and high-net worth individuals soon learned how to invest here also.
A measure of the phenomenal growth over the past decade of retail forex trading is that the variety of investment options have expanded, as well as the technical tools and sophistication of Internet-based trading platforms. Retail forex traders typically deal in the “spot” market where accounts are closed and re-opened every night, and the actual delivery of a foreign currency never takes place.
Substantial deposits are required to trade in this market if a prudent trading strategy is to be employed. Under those circumstances, one should never put more than 3% of his available capital at risk in the market on one position at any one time.
However, the nature of forex trading is high risk. On average, three out of four trades may be a loss for most. One must minimize the loss value of losses by exiting early on losing trades, and then extend the run of winners in order to offset losses and produce net-gains on a consistent basis. You must be able to absorb losses while waiting for winners.
Forex trading is not gambling, but many of the same principles apply if you wish to be successful. The odds favor the “House”, so to speak, because the market reacts to all manner of forces and public news releases, none of which can easily be predicted. Volatility is the name of the game, but your objective is to gain an “edge” and use it to your advantage to minimize losses and maximize gains.
In forex trading, your “edge” is experience and your technical analysis skills. Hours of practice on a forex trading demo is one way to gain invaluable experience. The other way is to find an experienced mentor skilled in the profession and then follow the wisdom of his advice.
Outside of the “spot” market, the futures market is another over-the-counter alternative. One can invest in regulated futures contracts or dabble in the new arena of currency options. For the average investor, options offer a low-capital way of accessing the forex market. Contract lot sizes do not apply. With this investment medium, you specify how much you wish to invest for a potential payoff, and if the currency pair reacts in the way that you anticipated, then you receive the reward; if not, you only lose the premium that you paid for the option.
Your downside is limited, and you know your potential upside when you enter your position. For this reason, these options are usually called “binary” or “all-or-nothing” options. “One-touch”, “Double-touch”, and “Double No-touch” are common varieties. You may still use technical analysis to follow the market and provide technical signals for trading, but you must reframe these messages to match the format of the options offered. You may need to check forex broker reviews because not all forex brokers offer currency options.
There are many ways to access the retail forex market. However, high-risk profiles prevail, necessitating specialized training and hours of demo practice to gain any edge at all. Caution and patience are “must haves”, too.
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