Forex, the Featured Guest at the World Money Show

By Nancy Zambell, BrokerAdviser.com | Feb 11, 2008 | comment

More than 14,000 investors gathered last week at the World Money Show, where the focus was on international investing.

More aggressive investors have been delving into foreign securities for several years and many have been amply rewarded, especially those who bought investments in the BRIC countries — China, India, Brazil and Russia.  Now, even more conservative investors are finding that international investing holds substantial appeal to them, due to several factors, including:

• The weak economy and volatile stock markets in the United States.
• The booming economies of international markets, especially emerging markets.
• The ability to add international diversification to their portfolios.

And while the World Money Show was devoted to a wide array of international investments, I noticed that investors were not only focused on learning about and buying equities, but also seemed to take a keen interest in learning more about one incredibly growing global investing segment — foreign exchange trading.

Foreign exchange trading, or Forex (FX) as it is commonly known, is the buying and selling of different currencies of the world.  Unknown to many investors, Forex is the largest trading market in the world, with more than US$2 trillion changing hands everyday.

According to Richard Olsen, founder of Olsen Limited, a Zurich-based e-finance technology and service provider, and one of the founders of OANDA FX Trade, a retail foreign exchange dealer, the Forex market is 10 to 15 times the size of the bond market and 50 times the size of the equities market.

The Forex market was created as a result of the need for large institutions as well as governments to exchange funds from currency to currency.  The market didn't add up to much until the U.S. dollar became decoupled from the price of gold in the late 1970s.  Prior to that, many other major currencies around the world were pegged to the U.S. dollar. Following this “unpegging,” global currencies began moving against one another, creating a market for currency speculation.

Today, according to Eugene Hawkin, chief operating officer of CMS Forex in New York City, some 85% to 90% of all volume traded on the market is purely for speculative purposes.

Ninety-eight percent of the Forex market continues to be populated primarily by institutional players, including large banks and multinational corporations, who employ it to offset their currency exposures and transfer funds across the globe.  But in recent years, the diversification possibilities as well as the weak U.S. dollar have made the Forex market more appealing to retail players.

And while Forex markets — like many equity markets — are easily accessible, allowing trading virtually 24/7 throughout the world, they do have unique characteristics that are different than traditional equity markets.

First of all, currency trading is always done in pairs, such as the U.S. dollar with the euro (USD/EUR), the U.S. dollar with the British Pound (USD/GBP), or the U.S. dollar with the Japanese Yen (USD/JPY).

As you might expect, traders must deal with a multitude of domestic and international, political, economic and market factors in the Forex markets, creating a hotbed of volatility.

This volatility can be very advantageous as good traders can earn astronomical returns.  In particular, changes in interest rates can create Forex opportunities, as traders will buy currencies in countries as rates increase.  Additionally, Forex traders find opportunity to trade currencies and make profits as a result of natural disasters, coups, recessions and elections.  These events frequently occur around the world, but most of us simply take note of them, then go about our business and never consider the profits to be made.

Profit potential is also aided by the ease of using substantial leverage. Forex traders can often borrow 400 to one, creating tremendous potential by trading with a huge sum of borrowed money and just a little of their own funds.  In contrast, equity traders can employ a maximum of 50% leverage, using margin.  But that very same trait can be a double-edged sword, as a highly-leveraged trade that goes the wrong way will quickly eradicate an entire account — something that novice Forex traders often find out, to their dismay.

If I haven't scared you away from Forex trading and you wish to explore it further, there are a few more cautions that experienced and successful traders swear by to increase your chances of winning:

Research and education. There are many free resources available online, as well as through the Forex broker you choose.  Find out as much as you can about the markets, their economic and political climates and their currencies before you risk your childrens' college funds.

Find a good broker. There are many Forex brokers and you will need to carefully research their offerings.  You will need a broker with a variety of analysis tools, charts and other technology to support your efforts.  And make sure you deal with one who is credible, with a good reputation and low fees.

Practice. Many online brokers will allow you to set up a demo, or virtual account, where you can practice with pretend money until you are ready to take the leap into using actual funds.

Invest only what you can afford to lose. Nothing further needs to be said.

Lose your emotion. Any successful trader will advise you that developing a practical system that's right for you, one in which you plan for success as well as failure, will ultimately be much more successful than “seat-of-the-pants” trading.  Fortunately, there are many software systems available to help you with this discipline.

Here are a few resources to help you get started:

www.cftc.com
www.forex.com
www.fxstreet.com

Lastly, Forex can be very profitable, but also extremely risky.  It's a market that requires discipline, planning and is best tackled a little at a time until you feel comfortable risking larger sums.

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