The Forex market gets a bad rap in the media and other segments of the financial markets for being risky. It’s not a deserved reputation. In fact, the volatility of currency exchange rates is markedly lower than that of most other markets.
Not surprisingly, in the five year period ending December 2010 the fixed income market represented by 2yr and 10yr Treasury Notes was the least volatile. The major US dollar exchange rates make up the next lowest volatility group. After that come the major stock indices, with small cap stocks (Russell) unsurprisingly more volatile than big cap ones (S&P 500). Oil has been comparably volatile to individual stocks, which have demonstrated the most volatility.
Clearly Forex is no more risky than other markets, and in most cases can be described as less so. In other words, when the media and others portray the foreign exchange market as highly risky they do so on a really faulty basis because the volatility readings just don’t support it. Relatively low volatility, though, does not mean there aren’t any real opportunities to profit in the foreign exchange market.
Clearly there are investment opportunities in the currency market – ones that are no more risky than playing the stock market. It’s a question of finding the way of taking advantage of them that is right for you and your financial objectives. So why do so many folks consider the foreign exchange market highly risky?
The answer is leverage. Those who call the currency market highly risky fail to differentiate between the market and the participants. It’s not that the Forex market itself is risky. It’s that traders and investors are offered the opportunity to play the market with a high degree of leverage. In the stock market leverage is limited to 2:1, meaning you can buy twice as much stock as you have cash in your account by borrowing the difference (day traders often are allowed to use somewhat higher leverage). In Forex it is possible to trade at 50:1 or higher leverage. Successful traders know how to use leverage judiciously and to their advantage – this takes experience, time and diligence. Many traders in the Forex market do not know how to use leverage to properly manage risk. This aspect of risk management is a key consideration as we review new Trade Leaders for our investment program.
Forex gets a bad rap – a big part is due to irresponsible traders who have no experience or risk management strategy. I also believe Forex gets a bad rap because of misinformation. People hear a story here or there and see liquidity and leverage and make assumptions. And, you know what happens when you make assumptions.
Are you a Smartie? Get the facts. Check out our free e-book “The Smarties’ Guide to Alternative Investing in the Foreign Exchange Market”.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.