Trading Forex is not, strictly speaking, an “investment,” in the sense that investing in a bond or a stock is. Traditionally an investment should be held for a long time to appreciate in value, and is usually a low or balanced risk, while the majority of forex trades are short term and higher risk/reward, completing in a matter of minutes or hours.
When you trade forex, you put your money at risk in an investment strategy. However, the risk can be managed with a prudent trading strategy.
As in all investment strategies, there is a ratio of risk versus return. Risk is high in forex trading, but it can be managed.
The high level of risk stems from the number of forces that affect the global forex market.
One can understand the technical reasons for a move in a given currency, but that move may go the opposite way due to a political or even a climate event. A storm, a plane crash, an election – all of these may change the rules about what happens to your trade.
And this is why a good trader starts the day by studying the calendar of events on forex websites, and by reading the news carefully. Even then, stuff happens. That’s what the stop loss is for.
So traders manage the risk when they put money on the forex market. They make use of the limit order and the stop loss.
They watch for patterns of trading, so that they can predict market action. Technical trading is all about this kind of pattern-spotting, and, in orderly trading – and there is orderly trading on many markets when events do not intervene – it’s possible to follow, for example, a Fibonacci retracement, to let it take its course, and to take advantage of it.
Orderly trading takes place most of the time, and, as a result, putting money on the forex market is safe if you understand what you are doing. A disciplined, well-educated trader is a safe trader.