While the exact size of the Forex market can be debated at length, a triennial survey from the Bank of International Settlement (BIS) suggested that the daily turnover for currency trading was $5.2 trillion at the end of 2016.
While this lower than a peak of more than $6 trillion, it increased incrementally after a tumultuous 2015 and remains the single most liquid and flexible financial marketplace in the world.
While this may be appealing to start-up traders, however, the market is also littered with potential pitfalls. In this article, we will look at these in closer detail and list the three things that you should look for when trading Forex:
The Marginal Nature of Profit and Loss
Currency is classed as a derivative, meaning that traders and buy and sell without ever assuming ownership of the underlying asset. Through practices such as spread betting, it is possible to speculate against the rise or fall of a chosen currency pair, creating an opportunity for investors to profit even in a strained economy.
As a result of this, Forex delivers margin-based returns, meaning that it is possible to earn far from that you originally committed as part of your investment.
Conversely, you can also lose far more than your initially bargained for, and it is imperative that you understand this delicate balance between risk and reward before taking the plunge for real!
The Demo Account
If you take one thing away from this article, we recommend that this would be it. A common feature of contemporary, online trading platforms like LCG, the typical demo account offers between three and six months of simulated trading experience that can prove invaluable as you look to achieve success in the market.
They replicate a full trading experience in a simulated, real-time environment, with the only difference being that you operate with fake, digital currency rather than your own, hard-earned cash.
In simple terms, demo accounts help to bridge the often sizeable gap between theoretical knowledge and practical experience, while enabling traders to hone their skills and develop new strategies for the fast, changeable and exceptionally volatile forex market.
Stop-losses and Other Risk Management Features
Of course, no matter how much you prepare for life as a finance or forex trader, you are not guaranteed to be successful. After all, the volatile nature of macroeconomics and sudden geopolitical shifts can render even good investments bad, so it is crucial that you implement risk management measures to help safeguard your capital.
Modern trading platforms offer a host of potential measures, with the classic stop loss feature providing a relevant case in point. This essentially allows to you establish a loss threshold at which trades are automatically closed, which in turn ensures that you can minimise financial loss whenever investments turn ugly.
Such a measure has particular importance in the forex market, which is open for 24-hours each day and often sees a number of seismic shifts during this period. By regulating your account when you are absent, you can protect your investment effectively and minimise loss wherever possible.