With investors being regularly bombarded with adverts to try foreign exchange trading, Kevin Rose considers how tricky it can be for those starting out...

Foreign exchange offers traders the lure of making a lot of money from a comparatively small position. However, budding George Soroses should do their homework before leaping in, as the risks are equal to the possible rewards.
The global foreign exchange (forex) market is the largest of the financial trading markets in the world. As an over-the-counter (OTC) market, it offers continual, unbroken pricing and trading 24 hours a day, from Sunday evening until Friday night GMT.

According to a BIS Triennial Survey last year, the average daily turnover on the FX markets is US$4 trillion, with one
third of the activity occurring during UK trading hours.

Joshua Raymond, chief market strategist at City Index, says the scale of the FX market is one of its many attractions.
‘It is the most liquid trading market available in the world. This also means that any kind of price manipulation by market participants is extremely difficult due to the sheer size of the market,’ he says.

At the margin
Margin trading means that traders can trade large positions with a relatively small amount of capital. Such leverage allows investors to maximise their returns on comparatively small movements up and down in the currency markets.
James Marshall of rival FxPro explains how such leverage can work: ‘Most forex brokers will offer leverage from 1:1 up to 1:500. As an example, with £2,000 of capital, using leverage of 1:100, you can make trades up to the equivalent of £200,000.’

Margin requirements are usually 1 per cent of the overall value of the position. When you trade forex, you are speculating on the value of two different currencies, otherwise known as a currency pair/cross.

Traders in forex can go both long and short, which, as Joshua Raymond explains, allows them to maximise on all market movements, irrespective of whether the prices of forex pairs are going up or down.

He says, ‘For example, if you believe that sterling will strengthen against the US dollar, you can buy the £/$ pair and your profits will rise in line with any increase in price of the £/$ pair. Similarly, if you believe that sterling will weaken against the US dollar, you can sell the £/$ pair, and your profits will increase in line with any fall in the price of £/$.’

To accommodate the speed, volatility and risk of the market, many different order types are available, ranging from basic ‘at market’ orders to more complex ‘contingency’ orders. Partap Rai, product consultant at TD Waterhouse, explains that this gives traders, who understand the benefits and risks involved with this type of product, the chance to be extremely selective as to how they trade.

Daniel Harris, operations director at H2O Markets, acknowledges that while leverage can be a great advantage, it must be treated with respect and approached cautiously.

‘We recommend that anyone who is looking to start forex margin trading should fully research and understand the risks involved,’ he explains.

He recommends that would-be traders open a demo trading account to familiarise themselves with all order types and place some trades to ensure they understand why currencies move.

Traders should also be aware of the economic data calendar and understand the impact on any potential positions.
‘When progressing to a live account, all beginners should be disciplined in selecting trade size, apply stop-losses to all trades and ensure that their strategy is always to cut losing trades early and let profits run,’ he adds.

Kevin Rose is editor of BestAdvice.net

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