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I hope you are ready to continue our sitting duck lesson today. Yeah, it’s a beautiful day to discuss the risks and profitability. How big the risk can be when I invest forex? Is it comparable with its benefits?
As a professional investor you must learn to see the investment not only from its profit. There are many other factors besides profit that you need to know, and one of them is called the risk. Forex is an high risk-high return investment program.
That means, forex is an investment with a high risk. But it has a possibility of high profit. It’s Comparable enough with the risk itself. Now, both sides of the profit and risk can not be separated with each other. This is like a coin that has two sides.
Ok if so let us begin to discuss about these matters. I will discuss the risk first. Hope that this nice day not becoming cloudy after you read this article.
In general, there are three main things you need to know before you start a forex investment, especially from the risk point of view.
First, the total loss possibility (this means the possibility of loss) can reach 90% of all funds that you invest. What? 90%? Well, it doesn’t sound so good. Yes it is not so good. But remember this is likely the worst case that may happen. Why it can reach 90%, this is because of helper called margin trading that’s mentioned in previous article. Not a helper anymore, is it?
Well, now you buy 1 lot of GBP on the GBPUSD pair at 1.9600. In the case when GBP value increased against USD, you will earn profit. Now what happens if the price moving down? How long can you survive?
In forex trading, even though you can open as many as 1 lots and only requires a guarantee only 100 Pound, does not mean that the minimum initial capital paid is only 100 Pound.
Broker’s deposit is usually set above the minimum price of 1 lot. There are some brokers who set a minimum account deposit about U.S. $ 250 or even U.S. $ 500. What's the point?
It’s to hold customer’s position if the price moves opposite to the current position of customer’s. For example, you started with investment of U.S. $ 250. 100 pounds (equal to U.S. $ 196) is used as guarantee for the position of the Open Buy that you’ve done. Then the remaining funds to be 250 - 196 = U.S. $ 54. That remaining fund is what they used to maintain your open position when the price was moving down, not increased as you expected.
Forex market is usually based on U.S. Dollar currency. That means that all transactions will be converted into USD and all that is listed on the platform in the Dollar.
The question now, with the remaining funds is USD 54, how far you can maintain its position? And what happens if the price moves down further than 54 Dollar?
Good question.
The answer to the first question, you can retain its position until the price moves down as far as 54 points. Basically, 1 point of 1 GBPUSD priced 1 Dollar. So if prices go down to 1.9546, then your remaining 54 Dollar will be gone.
Then what happens?
If the remaining 54 Dollars are running out, your open positions will be closed automatically by the system due to a lack of security in that open position. So, you are experiencing loss of 54 Dollar and now your funds only remain U.S. $ 196.
This situation is called margin call. Margin call is position that’s automatically closed by the system as the collateral deposits owned are running out. That’s a real nightmare for all traders.
So now the question is how long a margin call occurs with the remaining funds only 54 Dollar? GBPUSD pairs are very volatile pairs that can usually move up to 100 points per day. Thus, you may experience margin call and lose US$ 54 in 1 day!
Wow, is that true? Yes indeed. You could hit 100 Dollar a day, but also may experience margin call if the remaining funds held only $ 250. Later we will learn more, even if minimum account deposit is affordable enough only U.S. $ 250, to open an account with that minimal amount of fund have a very high risk and not recommended. Well, money talks and that's right. However, your capital will not lie.
If you started with investment of U.S. $ 1000 then have the remaining funds of U.S. $ 804 which means it’s enough to keep the movement several times. Please note that price is never goes up or down in one-way so many times. That means there is a possibility after going down 100 - 200 price points, they even increased again and move through 1.9600. Well, that’s your luck.
So that's the risk that we first learned. Quite bitter indeed.
Second issue is that there is the risk of liquidity. We have discussed earlier that GBPUSD movements can reach 100 points in just one day. That means the possibility of happiness / loss reached more than USD 100 per day!
What’s that mean? This means is that you can lose all your funds as mentioned above and all of it might happen in a very short time!
Try to calm and think about what if this happened to you?
You lose $ 250 of funds in just one day! Let’s say it took 6 months for saving to be able to start forex investment and then in 6 days all your savings are vanished. Theoretically, this thing may occur in the forex market. Bitter, but it’s real and possible. How do you feel if this happened to you?
So it can be understood that forex is high risk - high return investment program. And both of them can not be separated from one another. Never misguided by broker’s marketing who shows only the profits without ever describe about the possibility of loss may occur. Good forex marketing must also act as investment advisor for their customers.
The last risk is related to the trading method’s problem. If you see from the two-point of views that we shared before, we may conclude that the decision to initiate the buy / sell transaction is the most crucial and very significant. The decisions about when to get in and for how long / when should you buy or sell will affect our fund in the future.
Then the point of all this is whether we are skilled to predict movements of the price or not. Everything is reflected in the analysis we learn every day. Trading methods which we use and how the system that we have determine whether you end up your career as a trader or a looser.
The bad news is that there is no method of trading that can guarantee you a certain advantage continuously. A trading system is a system that was created by the many of best forex experts around the world. This is because a system may not match the profile of its user. There are several factors like: your amount of capital, the way you trade, your analysis, your experience, and the most important one is psychology of the trader. This will cause no trading method that can guarantee you a fortune to reach 100% again.
You can follow the best trader that ever you know. But that will not guarantee your happiness.
Now what? Forex seems to be so scary for you? But do not worry; I will not leave you confused at all the risks mentioned above. What was told before should be the worst risk that might occur on your account. There are many ways to prevent all of that happens to your investment. Here are some things you need to know about risk of investment in forex:
1. Make sure the funds you invest is more like a idle / dedicated funds for investment (risk capital)
We mean that idle funds is funds that are "not used" in long time or not used for a particular urgency. So these funds are devoted only for investment that has a high risk. You may think that no such funds exist. All of them will be used. But, what I mean here is:
Do not use your children's education fund or your family health’s fund to invest in forex. What will you do if your child's education fund vanished because of forex? That would be a disaster for your child.
One again, it is recommended not to use your credit card to play forex. If you are already an advanced trader and have the experience to always make a profit, then I have no comment at all.
2. Do not invest too early, only because you understand one or two forex techniques.
In fact, I still continue to study and learn while this article was created. Do not ever consider ourselves too advanced in trading and just because you have read a "secret recipe" from someone who has been trading forex and get profit.
3. Use the demo account facilities for a significant period of time before starting the real account.
The online forex trading service provider usually provides demo accounts for free to anyone who are interested in practicng forex and to use their platform. Specialties demo account is that all the regulations and the price are exactly same as the real accounts. The difference only the money that we are using is not real one. So theoretically if you experience any profit on the demo account the profit on the real account is not much more for you.
The problem is often even though they try their demo account and profit, the time to practice on the demo is not enough. The broker usually provides 1 month (and can be extended) for our needs until we feel truly advanced and ready to go to a real account. Once again the greed and impatience makes a lot of accidents that should not need to be happened.
4. Use the Stop Loss and Limit feature to limit profits and losses
Stop Loss is a facility provided by the platform to limit the losses that might occur in a position when we’ve done mistake in predicting movements in prices. While limit feature is useful for determining the price we wanted to take profit. Both facilities are available on common platform forex trading. We will discuss further in the section: Forex online trading and the Facility at a glance.
Ok, we have been learning about the risks that might occur in the forex trading, and also several ways to get rid of it. You may start thinking twice before trading forex because of the article you just read. Good if you do. It is the purpose of learning forex, helping you to start investing in a way that's right, measured and reasonable.
Of course, it’s not fair to discuss the risk without knowing how much potential you may get in trading. So, we also need to know what benefits we might get if we’re trading with forex. However, it seems I do not need to explain too long about this.
Well, there are many people who actually get a profit from trading up to tens to hundreds of thousands of Dollars every month. Although more of them loss (many of them should not need to loss if they have enough patience, and know how to trade better), forex investment remains a place that offers benefits, not like other conventional investment.
With a simple calculation based on the average movement of currency, for example GBPUSD, which is capable of moving up to 100 points a day, then buying 1 lot with just a day means that we can benefit up to 2000 points in one month (20 days x 100). Not bad huh? That is just 1 lot. Try to think what if we buy bigger lots due to the increase in amount of funds which we have? It can be big and bigger.
That is why many foreign traders who trade for their living. Just from your house and does not need to face traffic of major cities, hundreds to tens of thousands of Dollars we can generate only from trading. Thus, trading can help to increase the quality of life and also reduce the pollution on the road.
Try to imagine how’s the effect is when you create a successful trading formula that is right for yourself. A financial breakthrough (financially independent) will be part of your life and you can now leave the destiny to become lifetime employees. Sweet dream huh?
So from what we learned this in mind that basically profits and losses that may occur are comparable each other. Market can be best friends for anyone who profit. Instead he could become the worst enemy you meet because it can eliminate your investment in short time.
So, before you step further with your studies. Seems that someone who want to invest forex must love an adventure a.k.a. risk lover. If you are a risk averter which does not like risk, please stay away and choose the investment that is not too risky.
