When trading forex online there are advantages and disadvantages. Forex trading is when the currency of one country is exchanged with another country through a currency exchange rate system. Also referred to as FX, the purpose of fx trading is to obtain profit as a result of the purchase and selling foreign currencies. In todays article we will discuss some advantages of trading forex and some disadvantages to trading forex as well.
Advantages of Investing in Forex Online
1) Liquidity The forex market is extremely liquid meaning you can buy and sell currencies within seconds of a click of a button. Similar to stock trading, you can set automatic stop loss strategies to close yourself out of a trade and you can also set limit orders as well.
2) Leverage When a forex trader leverages a trade, this gives he or she the ability to make great profits while keeping risk to a minimum. A very small margin deposit can control a much larger total contract value. Look more into leveraging if you are interested in trading forex.
3) Trading Hours The most obvious advantage that is very appealing to investors who trade forex online is of course the fact that forex can be traded 24 hours a day. This leaves a lot of flexibility for trading schedules that many investors find very attractive.
4) Profit in Bear Markets When you trade forex you have the ability to make a profit when the markets are down. Investors will use strategies such as taking a long or short position depending on the price of the currency pair. For example, a trader can take a long position which means buying the currency pair at one price and selling it later at a higher price. As long as the trader chooses the correct direction they will continue to make a profit.
Disadvantages to Trading Forex Online
1) Volatility - Currency trading is very high risk with a very high reward. Forex prices are extremely volatile and make big moves continuously every day. Volatility combined with leverage can make for great profits, but with the chance for great profits comes the chance for great loss. Trader should use low leverage and stop outside of normal volatility. They should not use high leverage and stops with normal volatility. Investors simply must understand volatility before they even consider trading currency.
2) Spreads Forex brokers will quote fixed spreads depending on the currency pair. Since the forex market is so large, the odds are shifted against retails traders who work with brokers. Understand what a fixed spread means when trading forex. You may see why many traders prefer online futures trading when trading forex online.
3) Leverage While this can be an advantage is can also be a disadvantage. Margin calls can take place when the position carries too much risk for the account size. Traders quickly lose equity if they lack discipline in their trading plan. Many jump in thinking of the profit potential without realizing the downside.
Investing in forex online is a great way to make a living however you must understand the market, have strong trading plan in place, and you must follow it.
Market Direction: The market is still bobbing near its lows of the last eight years. Does this mean profits are going to be harder to make? Definitely not! To the contrary, these market conditions lend themselves to make even greater profits. Institutional money is still available. They were buying and selling Bank of America stock at $40 a share three months ago. The institutions will still buy and sell Bank of America stock at six dollars a share. They were buying and selling J.P. Morgan stock at $50 a share three months ago. They will still be buying and selling J.P. Morgan stock at $23 a share. Many examples of prices being dramatically lower can be given. US Steel stock was trading at $190 a share six months ago. Institutions are still buying and selling that stock at $30 a share. So what does this mean for profits?
Candlestick signals and patterns still work just as effectively whether the Dow is at 14,000 or at 8000. What is the overall investor sentiment? Stock prices are extremely low! Whether that is a logical assumption does not really matter. What becomes the underlying fear of most investors when the markets appear to be oversold? When the prices move up, they do not want to be left behind. This makes the use of candlestick signals that much more profitable. There are simple confirmation elements that indicate when a price move will be extremely strong. That can result from a candlestick signal followed by a gap up in price or it can be a breakout from a candlestick pattern. In either case, the results are historically the same. A big price move has a high probability of occurring. Even when the market is drifting lower or sideways, individual signals and patterns illustrate where big money is moving to.
Will there be long upward trends in these market conditions? Probably not, but simply changing the trading strategy to one that involves much shorter time frames can be extremely profitable. As illustrated in a recent Candlestick Forum recommendation, AMMD produced an extremely high probability trade. The breakout signal formed a Cradle pattern. The expected results of a cradle pattern produced a decent profit over a one-week period. While the markets were steadily moving down, AMMD stock was steadily moving up, which was the expected result of a Cradle pattern. Profits were taken when utilizing a very simple candlestick stoploss procedure. A price should not move back down through the previous days candle opening price when stochastics are in the overbought condition. Secondly, when prices move away from the tee line, the probabilities increase that the price will move back to test the tee line.
Entering a high probability trade at $10.73 and exiting that trade at $11.61 may not sound all that exciting, but it did produce an 8.2% profit in one week. That may not be as exciting as the 20%, 30%, or 40% profits the signals were producing when the market was demonstrating an uptrend four weeks ago. However, profits can be made very quickly using the candlestick signals correctly even when the overall market conditions are downtrending toward the recent lows. The compression of prices creates the opportunity for the fear/greed factor. The fear factor being that nobody wants to be left behind if a stock has moved from $40 a share to six dollars a share and might be on his way back up to $40 a share. That fear is stimulated by greed. The candlestick signals clearly illustrate when those emotional factors start coming into play.
These trades will usually occur when using only a portion of the total portfolio positioning. However, having the ability to recognize a high probability candlestick trade will allow for a number of these trades to be executed when the markets are moving sideways or down. Numerous trades of this magnitude can still produce an extremely good return over a one-month period. To reiterate, when prices are compressed in oversold conditions, the function of candlestick signals becomes all that much more compelling. Prices are going to snap back up with greater force when prices have been pushed down dramatically. Are stock prices down? They definitely are! And this is where the astute investor can take advantage of investor sentiment much more profitably.
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