Forex basics & risks

1. What are the Advantages of the FOREX Market over the Stock Market?
2. How safe are my investments in the FOREX Market?
3. Wouldn't the Market be affected as a result of so many buying and selling the same currency pairs?
4. Account leverage, what does that mean? (i.e. 100:1, 200:1 or 400:1)
5. Is it possible for me to lose more money than I currently have in my trading account?
6. Margin call, what does that mean?
   

1. What are the Advantages of the FOREX Market over the Stock Market?

   The Forex (Foreign Currencies Exchange) Market has existed for over 100 years to facilitate currency exchanges between countries. It is a virtual electronic exchange controlled by accredited brokers where anybody (world banks, businesses and speculators) can exchange their national currencies for other currencies. With global business expansion between companies in all countries the FOREX Market today is becoming more necessary than ever and it"s growth is obviously accelerating.

   FOREX Trading vs Stock Trading

   The Foreign Exchange Market (FOREX) is much different than the stock exchange.
   The FOREX is a short-term market while the stock exchange market tends to be more long-term. Most traders enter and exit trades within a 24 hour period in the FOREX. It is important to note that FOREX trades are commission free, so traders can place as many trades as they want without running the risk of huge fees, which are often charged in the stock exchange. The brokers earn their profits by setting a small spread, which is the difference between the buy (bid) and the sell (ask) prices.
   
   The FOREX is the largest financial market in the world which processes over 2 trillion dollars in transactions every day. This far exceeds the $100 billion that is traded on the stock market. It is one of the most liquid markets because of the heavy trading and massive volume realized in a 24 hour period. With the stock market, traders often hold their investments for a lengthy period of time, while FOREX traders often buy and sell more frequently, because the world economy relies on the constant movement of global currencies. The main advantage of the FOREX Market is that there is non-stop trading activity 24 hours per day and almost 6 days a week because it is all around the world.
   
   The FOREX is not based in any one location, so this enables traders from all over the world to trade currencies at anytime, day or night. Also, the FOREX Market is more predictable than stocks and follows well-established market trends. It allows higher leverage than the stock market, with the stock market usually being 2:1 leverage and the FOREX usually being 100:1 leverage or higher. The FOREX Market has mini and micro accounts with investments as low as $25 to get you started. (The software will not work with anything less than $500.) The ability to sell currencies without any limitations is another distinct advantage over equities trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero Uptick rule, which prevents investors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sell. See the comparative advantages of the Forex Market below:
   
   

   	Stock Market	Forex Market
   Size	100 billion/day	2 trillion/day
   Leveraging	Leverage 2:1 so you control $1000 with $500	Leverage up to 400:1 where you control $200,000 with $500
   Liquidity	Limited Liquidity	Extremely Liquid
   Stability	Investing in Companies which can sometimes be manipulated	Investing in Countries which are too large to be manipulated
   Choices	Over 40,000 Stocks to choose from which can be complicated	Only 6 major currencies, much easier to choose
   Accessibility	Open 8 hours/day 5 Days/Week	Open 24 Hours/Day 6 Days/Week
   Commission Fees	High Commission Fees	Minimal Transaction Fees

   
   

2. How safe are my investments in the Forex Market?

   WARNING:
   Currency trading exposes investors to a higher than average level of risk for the potential of a higher than average rate of return. Large potential rewards cannot be achieved without large potential risks. Before you trade with money of your own, it is STRONGLY suggested you utilize a demo/practice account to become familiar with the system and comfortable with the high degree of volatility in the FOREX Market. This is neither a solicitation nor an offer to buy/sell currencies, and no representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on our website. Past performance of any trading system or methodology is not necessarily indicative of future results. Never trade with money you cannot afford to lose. The risk of trading on the FOREX is due to its high volatility and especially to its high leveraging effect. Therefore it is very important to take the time to understand the leveraging concept and its consequences on your trading account because it will help you estimate and choose the risk you are willing to take.

3. Wouldn't the market be affected as a result of so many buying and selling the same currency pairs?

   The FOREX Market is so large that the group of people using the software could not possibly affect the trillion dollars daily that it trades. With the strategy you are usually trading percentages of your positions and not closing them out when a price point is realized. Also since your buy and sell points are based on the exact rates that you received when you started your portfolio no other investor will have the same price points as another.

4. Account leverage, what does that mean?

   (i.e. 100:1, 200:1 or 400:1)
   When you open a FOREX trading account you must specify the leverage ratio you will use. This account setting enables you to control 100 to 400 times more money than what you actually invest.
   Therefore if you invest $500 in a position with a leverage ratio of
   a) 100:1, you control $50,000 of currency.
   b) 200:1, you control $100,000 of currency.
   c) 400:1, you control $200,000 of currency.
   
   Consequences:
   If your position increases by only 0.1%, which is a small fluctuation in the FOREX that can easily occur in a less than a few minutes, your potential profit would be
   a. $50 with a leverage ratio of 100:1. 10% yield on your $500 investment
   b. $100 with a leverage ratio of 200:1. 20% yield on your $500 investment
   c. $200 with a leverage ratio of 400:1. 40% yield on your $500 investment
   This is great but at the same time a decrease of 0.1% would put you in a loss.
   
   IMPORTANT: The profit/loss value shown in your trading account is continually fluctuating with the market prices. This value will become realized only when you close your position(s). Here is another possible and extreme scenario. Let's say that you open a trading account with $5,000 and that you invest $500 in a position, your account reserve would be $4,500. Now let's say that because of a special market situation your position decreases momentarily by 3%, therefore you would end up with the following loss:
   a. $1500 with a leverage ratio of 100:1. (200%)
   b. $3000 with a leverage ratio of 200:1. (400%)
   c. $6000 with a leverage ratio of 400:1. (800%)
   
   In scenario a and b your reserve is higher than your loss so you could decide to wait until a market reversal or close your positions to avoid suffering a potential bigger loss. However scenario c would most likely never happen because the broker's system would trigger an automatic "Margin Call" to avoid being on the hook for the missing $1500. However, if the margin call could not occur on time then you would possibly be liable for the additional losses no matter the amount. Fortunately the investment strategy offers a protection against this rare possibility by having you trade currency pairs which historically and statistically move in opposite directions. See the page How does it work? to learn more about how it works.
   

5. Is it possible for me to lose more money than I currently have in my trading account?

   Yes it is possible that the margin call cannot be executed fast enough when your free margin reaches 0 (as explained above). This may happen if the FOREX moves abruptly and abnormally. Ask your broker about its margin call policy. It is highly recommended that you familiarize yourself with a demo account before you begin trading.

6. Margin call, what does that mean?

   A Margin Call is usually activated automatically in real-time by the broker's system, which closes all positions before the market has a chance to move farther against your trades. This is in place to protect you from losing more money than you have left in your account (Reserve = Account balance - amount invested). The Margin calls are executed (under normal conditions) when your loss equals your reserve or in broker's terms (MetaTrader software), when your free margin falls to 0. The free margin fluctuates with your positions' value and is calculated as follows:
   - Free margin = Initial Account Balance - Margin (amount invested) + profit/loss of your positions. In other words, your account reserve must always be greater than your current portfolio profit/loss otherwise a margin call will be triggered.
   - Initial Account balance - Margin (amount invested) > profit/loss
   After a margin call, your portfolio value is not necessarily null. If the margin call is executed under normal conditions your new account balance will equal your initial margin. Here is why: The account equity is your real time current portfolio value. Therefore, when you close all your positions, your New Account Balance (NAB) equals your account equity:
   - Account Equity = Initial Account Balance + Profit/Loss of your positions = NAB. Given the fact that a margin call occurs (under normal conditions) when the free margin = 0, then
   => 0 = Initial Account Balance - Margin + Profit/Loss
   => 0 = (Account Equity - Profit/Loss) - Margin + Profit/Loss
   => Account Equity = Margin