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Risk Warning
Trading foreign
exchange on margin carries a high level of risk, and may not be suitable for
all investors. The high degree of leverage can work against you as well as for
you. Before deciding to trade foreign exchange you should carefully consider
your investment objectives, level of experience, and risk appetite. The
possibility exists that you could sustain a loss of some or all of your
initial investment and therefore you should not invest money that you cannot
afford to lose. You should be aware of all the risks associated with foreign
exchange trading, and seek advice from an independent financial advisor if
you have any doubts.
Trading & Investment Myths
The foreign exchange
market is one of most popular markets for speculation because of its enormous
size, liquidity and tendency for currencies to move in strong trends
relatively frequently. These characteristics enable traders to have
tremendous success as well as failure. However, success has been limited
mainly for the following reasons.
Many traders come with false expectations of the profit potential and lack
the discipline required for trading. Short term trading is not an amateur's
game and is usually not the path for quick riches. Because currencies may
seem exotic or less familiar than traditional markets (i.e. equities,
futures, etc.), it does not mean that the rules of finance and simple logic
are suspended. One cannot hope to make extraordinary gains without taking
extraordinary risks. A trading strategy that involves taking a high degree of
risk means suffering inconsistent trading performance and often suffering
large losses. Trading currencies is not easy (if it was, everyone would
already be a millionaire), and many traders with years of experience still
incur periodic losses. One must realize that trading takes time to master and
there are absolutely no short cuts to this process.
The most enticing aspect of trading currencies is the high degree of leverage
used. Leverage seems very attractive to those who are expecting to turn small
amounts of money into large amounts in a short period of time. However,
leverage is a double-edged sword. Just because one lot ($100,000) of currency
only requires $1000 as a minimum margin deposit, it does not mean that a
trader with $10,000 in his account should easily be able to trade 10 lots or
even 5 lots. One lot is $100,000 and should be treated as a $100,000
investment and not the $1000 put up as margin. Most traders analyze the
charts correctly and place sensible trades, yet they tend to over leverage
themselves (take a position that is too big for their portfolio), and as a
consequence, often end up forced to exit a position at the wrong time.
If an account value is $10,000 and the trader places a trade for 1 lot, he is
in effect, leveraging himself 10 to 1, which is a very significant level of
leverage. Most professional money managers are not allowed to leverage even
this high. Trading in small increments on the account will allow the trader
to endure many losing trades without experiencing large monetary losses.
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