How Safe Is Currency Trading?
Trading currencies is a fast paced way to both win and lose money. More than US$2 trillion of currencies are traded daily among brokers, traders, banks and individuals. Unlike other stock transactions, when someone wins a trade in currencies, someone else loses. The fluctuations are based on buying and selling one currency against another and can create large losses and equally large wins, offering no assurances either way.
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Function
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Individuals who trade currencies online do so through brokerage houses using various trading platforms. The currency movements are called pips and are defined as "the smallest price change that a given exchange rate can make" by investopedia.com. Each pip has a value, generally the equivalent of 1/100th of one percent of a currency unit -- in the case of American dollars, a pip would be 0.01 cent, or $0.0001. When you trade currencies, you choose which pair you think will move based on economic factors and trading strategies. If you think that the euro is ready to increase in value and that this would cause the dollar to decrease, you could either buy euros or sell dollars, making money either way if you are right.
Types
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Currencies are traded in pairs against each other such as euro/dollar or British pound/yen. The most commonly traded currency is the U.S. dollar, USD, due to its liquidity. Other actively traded currencies are the euro, EUR, Japanese yen, JPY, British pound, GBP, and the Swiss franc, CHF.
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Considerations
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Currency trading is as safe as your available account balance. Traders set stop losses or triggers that indicate how much you are willing to lose on a given trade. The market fluctuates enough so that if your stops are set far away from the low or high point, you can absorb the fluctuations easier and make money. If your account balance is low, you have less money to lose so your stops have to be tighter. Market fluctuations will likely cause you to lose money based on your inability to ride the ups and downs.
Warning
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If anyone tells you that trading currencies is a safe way to make money, be very wary of what they might be trying to sell you. Trading currencies is not safe for small traders with limited resources and little knowledge of market movements. The safest way to trade currencies is with a large cushion in your margin account, to always use stop losses, and to remove your winnings as often as possible.
Benefits
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Trading currencies can be a lucrative way to earn a living, if you take proper precautions with each trade. Most brokerage houses offer demo accounts so you can learn the particulars of trading before using your money. These demo accounts are helpful, but there is a significant emotional difference when you are trading with your own money. Keeping emotions out of currency trading is one of the most difficult aspects to learn and practice. If you can master your fears and your greed while maintaining a sufficient account balance to absorb the fluctuations, you will have a better chance to benefit from currency trades.
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Resources
- Photo Credit http://www.forexcurrenciestrading.com
