There are a lot of traders in the industry who believe that Forex trading is nothing but gambling. Perhaps they’ve jumped to this conclusion from the fact that every time you take positions on currency pairs, speculating whether the prices will rise or fall, you’re almost placing bets. But does that really mean that forex trading is in fact like gambling? Visit multibankfx.com
Read on to know about the factors that debunk this myth and also learn about some trading techniques to optimize your gains.
Trading vs gambling
An amateur gambler enters the game with no strategy or plan in place. He simply pays the host a certain fee to stay in the game. Since he/she is still learning the tricks of the trade, the returns are inconsistent. If you compare this situation with that of a forex trader who is still a novice, you may find some similarities. Like the inexperienced gambler, this new forex trader also does not study the market and/or does not strategize before going ahead with transactions.
Trading Forex as a business
Technical analysis is perhaps the best way to find trading positions that suit you the most. This could give you an upper hand in forex trading when done right. Technical analysis is best understood as a way of decoding technical indicators as well as market charts. This makes it easier to pick trading positions that can ensure good returns.
Since traders all over the globe refer to the same charts and indicators, the pattern is the same for everyone. How one perceives it and one’s understanding of it is the deciding factor. The right interpretation results in the right investments. Your speculation will help you choose a stock whose price movement you can predict accurately.
Understanding and taking stock of the risk-reward ratio can prove to be a great technique to up your trading game. The amount you’re willing to risk in order to meet the expected return in trade is compared to calculating your risk-reward ratio.
This is not as simple as understanding whether the currency pair could move upwards or downwards. However, analyzing it would bring consistent results and improve your chances of succeeding as a forex trader in the long run.
In the short term, the market can be particularly volatile. However, if you try to see beyond the fluctuations and weigh in the long-term benefits through technical analysis, you would see how you could land yourself in the sweet spot!
The trick is to enter, stay and exit the market with a concrete, well-researched, and structured plan. The more prepared you are, the better you will do. It does not mean that your portfolio would be immune to the variables at play in the market. They would continue to make the market unpredictable but what you can do is work towards earning more profit and minimizing the risks.
Risks involved in trading Forex
Given how high the trading volumes are, forex assets are considered to be highly liquid assets. The large chunk of forex trades includes spot transactions, forwards, foreign exchange swaps, currency swaps, and options. It is important to take into consideration the risks associated with forex trades as leveraged products which could lead to major losses.
1. Leverage Risks
If you use leverage in your forex trades, you would have to deposit a small initial investment known as margin, to be able to access the substantial trades in foreign currencies. Small shifts in the price fluctuations might lead to margin calls where you may have to pay additional margin. When the market is volatile, using an aggressive leverage trading strategy can cause severe loss.
2. Interest Rate Risks
Any textbook on macroeconomics would tell you that interest rates could positively and adversely affect countries’ exchange rates. If a country’s interest rates improve, its local currency would strengthen as the number of investments in that country’s assets go up. This happens because a stronger currency ensures better returns.
3. Transaction Risks
Transaction risks are exchange rate risks linked to the difference in time that may occur when the contract starts and when it matures. Forex trading is carried out on a 24-hour basis which could lead to a shift in the exchange rates even before the trades have settled. As a consequence, currencies could be traded at various prices at different points of time in the trading hours. As the time gap between entering and settling a contract widens, the transaction risk also increases.
4. Counterparty Risk
The counterparty in any financial transaction refers to the company which helps the investor in getting the asset. As a result, counterparty risk implies the risk of the broker or dealer defaulting in a certain transaction. Spot and forward contracts on currencies in forex trades are not under any exchange’s guarantee. Counterparty risk in the case of the spot forex market results from the solvency of the market maker. When the market turns volatile, the counterparty may not be in a position to adhere to contracts.
5. Country Risk
When you assess the different options to invest in currencies, remember to take into account the structure and stability of the country you’ll put your money on. Central banks have to maintain sufficient reserves to ensure that the fixed exchange rate remains stable. A currency crisis could take place due to recurring balance of payment deficits which can cause the currency to devalue. In the long run, this can adversely affect forex trading and prices.
In conclusion, it is reasonable to say that forex trading is not gambling. It demands hard work, research, and the ability to analyze technicalities in order to earn more.
Remember that forex trading is very risky and there is a good chance of incurring losses. As you work with a currency pair, a number of variables come into play. But it helps to know that every trade and investment comes with its own set of risks.
You can always limit the risks when trading forex by never using leverage or borrowed funds and by not investing more than what you can afford to lose.