There are two factors that really determine whether an investor will risk capital or not: the potential for profit and the ability to liquidate the position should things start to head south. Real estate is a very stable investment for one simple reason: they aren’t making any more of it. In time, all property value rises making it a fairly safe investment vehicle but it takes a long time to liquidate—especially if the market suddenly goes south!
The currencies market, on the other hand, is an entirely different beast. The Forex, also called the Foreign Exchange market, is the largest and most fluid in the world. Nearly 2 trillion dollars are exchanged 24 hours a day between Sunday afternoon and Friday. It is very fluid making it attractive for investors because there always seems to be someone willing to buy or sell a position. Investors are also attracted to the Forex because it is very volatile which provides great potential for profit. There are five basic options available to a retail Forex trader, including:
· Spot transactions
· Forwards and futures
· Options
· Spread betting
· Contracts for difference
The vast majority of Forex traders stick with spot transactions. These straightforward transactions simply involve the exchange of one currency for another. To choose currency pairs and determine entry and exit points, most traders opt to either trade based on news releases and fundamental analysis—or to study performance charts and track price movements using technical analysis.
Fundamental analysis typically is used in scalping or day trading. Forex scalpers try to anticipate price movements in the short-term and generally do not hold a position for more than a day or two. In some cases, positions may be bought and sold in a matter of hours. However, this is considered an especially dangerous trading strategy because the heavily leveraged positions tend to reach stop/loss points quickly and losses can mount quickly.
Technical analysis is essentially aimed at identifying and capitalizing upon trends. The moving average is a favored technical indicator used to guide investment decisions. To identify trends, technical investors look at the historical data of currency rate prices. The moving average helps smooth out the erratic nature of lines causes by the daily highs and lows and is refreshed daily with the most recent day being added and the oldest entry dropped. The larger the sample (in other words, a 10-day moving average is smaller than a 50-day moving average pricing chart), the smoother the lines will be on the charts.
Simple and exponential moving averages can also be used to further identify trends. Resistance and support levels are sometimes then identified as entry and exit points in some Forex technical trading strategies. The simple truth is that you have to find the strategy that best suits your trading style. Then, to improve your odds:
· Avoid over-trading—Forex traders can make big profits but can lose equally big due to highly leveraged accounts and a very volatile market. Over trading increases the odds that you will lose money—period.
· Trust charts—once you have your strategy and set your exit points, let it ride. Study the charts at the end of the day—and stick to your strategy.
· Patience is a virtue
· Back test to continually test your investment strategy
No investment strategy can predict price fluctuations with 100% accuracy. However, the best strategies for Forex tend to involve technical analysis, using stop/loss points with every order, and trusting the charts and strategy while avoiding the temptation to over trade. You may incur a loss once in awhile but the steps listed above will definitely put the odds of success and profit in your favor.