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Is it worthwhile to trade currencies?

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Trading forex can be lucrative, but it's tough.

Trading foreign exchange is a seriously risky business, but it can also be seriously lucrative.

As one very successful trader once told this writer: “In forex trading, the market will screw you if it can.”

There are ways of reducing risk and protecting the funds in your trading account. But forex trading requires a lot of attention – take your eyes off the account for a few minutes and you could be very, very sorry.

Is it worthwhile? A careful trader, once a certain level of experience is gained, can earn a significant percentage of return. How great a return depends on attention and skill. You will need to invest at least €1,000 to get started; some online platforms will start an account for you for less, but small sums tend to disappear quickly in rapid trade movements, even with good management.

Of course, if you invest €1 million, it is relatively easier to achieve gains than if you only invest €1,000, because even a tiny price movement in your favour brings in a substantial return.

Individual investors who wish to trade forex are advised to go one of two routes: the Forex trading broker, or an online platform for this kind of trading (these are run by brokers).

The vast majority of online trading takes place on the MT5 terminal which you can download for free from its maker MetaTrader. But the online platform you choose is likely to have one to offer you, and it is often tweaked for the broker’s specific needs.

You will be offered a chance to open a free demo account at most brokers, and it’s wise to familiarise yourself with the format first. Just remember: Trading on a demo account is not at all like the real thing. It’s only when your money is at risk that the real trader shows his/her stuff, and once you launch a forex trade, it’s out of your control until you close it. There is no pause button.

You either buy or sell a currency pair, like GBP/USD using your online account, and you try t0 determine, using various tools, whether you expect the pound to rise or fall against the dollar. You use ‘stops’ to limit risk, meaning that when you gain a certain amount or lose a certain amount, the stop closes the trade. Forex pair prices can change in a nanosecond, so even if you’re sitting and watch with your finger on the mouse, you can lose a fortune in the time it takes to click – use stops!

Then there are any number of approaches to forex trading – Elliot Wave, Momentum, the very traditional use of Fibonacci number sequences, just to give a few examples.

But the basic principle remains the same in all of them. Forex trades move higher and lower in wave patterns all day long, from Sunday morning to Friday evening – this includes nearly all of the currencies in the world except for those that are pegged to the dollar or another major currency.

You make sense of these movements based on either fundamentals – the ECB raises interest rates, so the euro goes higher, or any other event of this kind – or technical trading which just looks at price movements.

Fundamentals trading is somewhat easier if you are just starting out, but is far less predictable than technical trading. You know, for example, that the Bank of Japan is making an announcement today, and it looks like it will announce a new policy. You have carefully read analysis, and you think that it means the yen will go higher. So you buy JPY/EUR, for example. And wait to see what happens.

Technical trading looks for two things in price movements: Resistance and support floor. Choosing a single currency pair, you watch for the point at which the price stops rising – the point of resistance. Your currency pair goes from 90 to 100, then drops to 95, then goes back to 1o0 again. This makes 100 a probable point of resistance. Or the pair drops to 90, and then goes back to 95, then to 90 – 90 is probably the support floor.

Certain types of trading patterns show up on the charts on your terminal indicating that resistance is likely to be overcome, or that a price will drop below a support floor. These can be learned from books on forex trading. Your terminal will have other tools, indicators and special programmes that also help you to determine when to buy and when to sell.

And the longer you trade seriously, spending at least a few hours every day, the better you will get at it.

But for some HNWI individuals, there is the other alternative of working with a forex trading house.

Cyprus, as is well-known, is home to a large forex broker industry. These houses usually offer to trade for you, using either a model trading strategy or an algorithm. The model trading strategy uses a well-defined approach that has a history of success, and it is usually applied via a computer programme.

The algorithm offers automatic reactions in specific trading conditions, trading always at specific times, or at specific price levels.   This kind of trading is very efficient, and low-cost, and produces usually a 6-12 per cent return per month, although some trading houses may be able to show a higher return.

Yes, it’s worthwhile. But it’s tough. It can also be great fun, and really satisfying.

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