Trading is often perceived to be a risky affair where you can lose your entire life savings. Just ask those who were caught up in the stock market crash of 1929. Yet there are securities which can be traded where the risk is reduced versus equities: Forex. The Forex zero-sum game has less chance of blowing up in your face because when you are buying one currency you are selling another.
For anyone following finance events recently cannot have missed the bankruptcy of Carillion and Debenhams entering administration. In both cases shareholders were wiped out, loosing everything. Forex is not as explosive as stocks and less risky. Forex is simpler than equities where you have hundreds to chose from. There are only a handful of major currencies to chose from, making the choice easier. Also you are able to take advantage of intraday volatility. It is reassuring to know that the Forex market is the largest and most liquid in the world. The Forex zero-sum game also allows many to benefit from Forex trading. Different people have different strategies meaning it’s possible that two counter parties can both benefit from a trade.
Another advantage of Forex zero-sum game is that currencies are less volatile than stocks. Although currencies can suffer large one day losses, the CHF/EUR in is an excellent recent example, intraday volatility is usually around the 1% mark. Although some volatility is good for trading, too much is a headache! Forex trading gives you the right balance of volatility with some sense of trend, allowing you to profit from opportunities. Central banks monetary policies are the one area to watch closely. A move in the interest rate can have a big influence in the value of that currency, especially if it is unexpected.
Although the reduction in risk that a Forex zero-sum trading can give you is an advantage, it should not be traded away. This is where risk reduction techniques come to play. The first rule of trading is not to lose money. Risk management should be seen as a chance to make money. A risk adjusted approach, where you only trade a portion of your portfolio and make a return consummate to the risk you took allows to put this into effect. For example, do not risk more than 1 to 2% of your portfolio in any given trade. Expanding on this, one of the best approaches is to use, is the risk reward ratio. This ratio teaches you to risk less money than you intent on making.
For the Forex zero-sum game to work for you, you have to ensure that you are in the game! This is where we talk about the perils of leverage. Just because a broker offers you leverage does not mean you should take it. Especially for new retail Forex traders, leverage can blow up your account. We have all been there: you have a few successful trades and then before you know it you have gone big (using leverage). The Forex zero-sum game no longer applies to you because you have lost all your capital.
The Forex zero-sum game is a way of trading and earning a second income with a lower risk than equities. Because you own two currencies, your investment cannot go to zero. Currencies are also less volatile, especially the major currencies such as USD, EUR and GBP. Learning to watch central bank announcements will have to become second nature. Doing so will ensure you trade successfully!