Forex Management

When we keep cash, we need to decide on which major currencies to hold: Is it going to be USD, GBP, EURO, JPY, CHF, AUD or others? Holding the wrong currency can easily result in a loss of value between 5-20% in a year. On the contrary, a correct decision can increase your wealth by similar margin.

Foreign currency transactions and investments may sound risky to many retail investors. The foreign exchange (or 'forex') market are largely dominated by banks and institutional investors. Individual investors need to understand the benefits, risks, and the most effective ways to invest in foreign currency. Bank traders only make up 5% of the total number of forex traders with speculators accounting for the other 95%, but more importantly is that the 5% of bank traders account for 92% of all forex volumes.

There are no miraculous secrets to trading forex. All those special indicators cannot guarantee you profit in the dynamic forex market. You simply need to understand how the major players (bankers) trade and analyze the market. If you get the fundamental economic aspects right then you are well on the way to success.

Benefits and Risks of Investing in Foreign Currency

There are many benefits and risks to consider before deciding to invest in foreign currency.

While it is the largest and most liquid market in the world, investors should understand, recognize and accept the many risks that set it apart from traditional investments. Most importantly, the high leverage used when investing in foreign currency can result in high volatility and greater risk of loss.

The key benefits of investing in foreign currency include:

  • Large and liquid market. The foreign exchange market is the largest and most liquid market in the world, with average daily volume in excess of $5 trillion.
  • Diversification. The foreign exchange market offers investors a way to diversify away from potential risks associated with the U.S. dollar as an asset class.
  • Trading Hours. The foreign exchange market operates 24 hours a day, five days a week, which is longer than most traditional equity, bond, or futures markets.
  • Potentially Low Costs. Most foreign exchange trading doesn't involve paying a commission, but rather, a bid/ask spread that tends to be tighter than equities.

The key risks of investing in foreign currency include:

  • High leverage. The foreign exchange market moves in very small increments, which makes high leverage (via margin) a necessity and risk for those investing directly.
  • High volatility. The foreign exchange market is known for high levels of volatility due to economic reports, central bank interventions, and other factors.

At FOINS, we aim to educate our members on risk management techniques to help mitigate these risks and improve their long-term returns. In addition, it is important to keep ample capital on hand to avoid any risk stemming from the use of leverage when trading directly on foreign exchanges.

Our education philosophy in Forex Trading is simple:

  • Use small leverage and pay attention to economic fundamental of each major currency. A lot of money can be made from trading the economic data, fundamental & Central Bank policies of a major currency;
  • FOREX investment is for long-term (3 – 24 months) cash value appreciation. Nobody should lose from Forex Investment if time is not a limitation;
  • Avoid daily speculative trade. Those is no point to earn 50% a month just to lose it in a few days. There is no meaning to earn less than one percent from 100 trades and lose 10% just on a few.

Forex investment is very dynamics. It requires continuous financial education for one to be able to maintain his/her currency portfolio at a profitable level. As long as one keeps a certain amount of Cash, Foreign Currency Investment is a skillset that one needs to maintain for a lifetime.

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