Seeking investment strategies to achieve diversity and cope with market volatility? Many investors are considering forex. What are the pros and cons?
Seeking investment strategies to diversify your portfolio and protect against market volatility? A growing share of retail investors are trading foreign currency, a risky, but potentially rewarding strategy. What are the pros and cons of the forex market?
Retail trading makes up a small, but growing share of the $4 trillion forex market – a share that’s expected to continue to grow as individuals seek investment strategies other than traditional stocks, bonds and cash in increasingly volatile markets. Currency brokers catering to retail investors have increased their share of forex trading volume to 18 percent, up from 10 percent in 2010, according to an article appearing on the online Wall Street Journal in April. Why is forex gaining traction as an investment strategies?
“Forex trading is a popular form of investment that more people are turning to with hopes of earning money. In the past, the forex market was mainly reserved for the wealthy banks. Today, however, practically anyone can get into forex trading,” states the website myforextip.com.
A notable feature of forex trading – leverage – makes it possible for investors to make a large amount of money on a relatively small investment. But in the volatile forex market, leverage also makes it possible for investors to lose an equally large amount of money on that same small investment – and to lose it in a very short amount of time.
Advantages of Forex markets - compared to other alternative investment strategies - include their liquidity and accessibility. Forex exchanges are open 24 hours a day five days a week, and trades involve fewer fees than other markets, according to myforextip.com. A number of online services make forex accessible to retail investors and automated trading software can help take some of the emotion out of trading. (Find out additional reasons why forex is gaining currency among affluent investors.)
The forex market is also attractive to investors seeking greater investment diversity. “Diversification simply means that you invest your dollars in different properties and markets,” according to Forexcell.com. “By investing your dollars in different ventures, you will have a better chance of absorbing a loss should one market turn sour.”
Diversification within the currencies market can include commodity-based currencies, such as the Australian dollar, according to Forexcell, which explains that commodity based currencies increase in value when the U.S. dollar weakens. (For more information about currency pairs check out First Foray into Forex.)
The forex market is also distinguished by being among the investment strategies the most vulnerable to scams, according to regulators, who urge extreme caution when selecting a forex broker.
Retail investors considering forex trading should first carefully define their tolerance for risk in the context of larger financial goals, such as saving for college tuition or retirement, according to the website www.forexfraud.com, which also recommends beginners undergo a period of study and practice by opening a mini account. Investors are also urged to select a leverage ratio consistent with their risk tolerance and to begin by trading with small sums and focusing on a single currency pair.
For other investment strategies to achieve diversification and protect against volatility, read about Alternative mutual funds and commodity mutual funds.