Many people believe they are getting a great deal by trading foreign currencies. However, the truth is that this investment is not as attractive as it looks. There exist many pitfalls to be aware of, including news shocks, commissions, and leverage. In this article, we’ll take a closer look at these issues and what you should keep in mind before deciding to trade. This is a general overview of Forex and futures trading.
Complications
Forex and futures trading are speculative markets that require a great deal of research. The forex market is the basis for global trade, and the banks carry out around $6.6 trillion in FX transactions every day, equivalent to the UK’s annual GDP. However, there are many pitfalls to avoid. For example, investors should be aware of the risks of losing money, as the currency markets can be unpredictable.
Leverage
Leverage is a powerful way to make profits in the forex and futures markets. Leverage works by using a small amount of money to trade large amounts of money. For example, using leverage of 100:1 would mean that a trader would make $500 instead of $5. While it sounds like it is great for beginners, it can also be dangerous. A small investment can turn into a major profit or wipe out the initial investment.
Many traders use leverage in order to increase their trading position without taking on a lot of risks. While using margin to increase your profits, you should consider the risk of losing your entire investment. If you’ve ever traded stocks, you’re likely familiar with margin accounts. However, there are some important differences between forex and futures trading. While it’s tempting to borrow more money than you have available in your brokerage account, you should know that using leverage can greatly increase your risk and amplify your losses.
News shocks
When trading currency pairs, one must be aware of news shocks. A major economic event such as an earthquake in Haiti could send the currency pair higher. However, these shocks are temporary. Oil prices are recovering quickly, and the dollar has recently hit a seven-week high versus the yen. The Sterling has also made a six-week high against the dollar. The Forex and futures market is based on information and predictions.
While most investors invest in stocks with the expectation of a stock’s rise in value, a large number of futures traders have no interest in the fundamental value of the underlying security. This is a major difference between trading forex and futures. In the latter, traders’ interests are entirely based on speculation rather than the fundamental value of the underlying asset. Therefore, they are not affected by news shocks.
Commissions
The fees you pay for Forex and Futures Trading are governed by contracts between you and a futures commission merchant. Commissions for foreign exchange trading are usually based on the size of the trade, with larger trades attracting larger fees. A common example is the EURUSD. For a trade of one million EURUSD, you will pay $10, but for trades of ten million EURUSD, you will be charged $100.
When comparing commission rates, look for hidden fees. These include monthly or quarterly minimums, margin costs, and charges for contacting the broker by phone. You also require to think about how much you trade. If you trade in large volumes, you may want a broker that charges a flat fee regardless of the size of your trades. Smaller traders may prefer a trading commission based on their trade size.
Choosing a trading vehicle
Using technology is an integral part of today’s society, and trading in the forex and futures markets can be no different. Today, technology allows you to trade from the comfort of your home with a click of a button. When it does come to trading, however, you must choose a trading vehicle that suits your style. Forex and futures trading requires different capital requirements, and you may wish to focus on one or two futures contracts.
You can choose to trade in the forex market if you have less than $25,000 available. If you intend to focus on a single currency pair, futures and forex are good options for people with limited capital. Futures and forex trading are more complex, but the advantages of these two investment vehicles are many. Choosing a trading vehicle for forex and futures trading depends on your goals, experience level and money.