Tuesday, 26 April 2011

Forex Trading Online As a Part of Investment Portfolio

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In the current market situation, conventional long-term investment in stocks, bonds, and mutual funds can no longer comprise 100% of one’s portfolio — simply because it can no longer provide the desired safety of capital. The world’s markets have become so interdependent that all asset classes are now very correlated. This means that they rise and fall together, fully exposing the investor to global risks. Diversification of one’s holdings is more important now than ever, and equally hard to achieve. Here is where forex trading online comes into play.
The way to achieve true diversification is to include currency investments and active trading strategies into one’s portfolio. Currency investment takes many forms, from the very conservative buy-and-hold of government bonds nominated in foreign currencies to short-term speculation on forex. Currencies rise and fall out of sync with stock markets. For example, while the Dow has lost 34% in 2008 (Jan 01 to Dec 31), the Japanese Yen gained 23% in the same time period. Of course, the opposite may happen as well. It is important to note that currency exchange rates are affected by different factors than stocks. A stock has a natural tendency to follow the company’s earnings. If the company grows its business, the stock price follows. Currency value does not depend on the health of a country’s economy as much as on the actions of the issuing central bank and inflation. Consequently, the main difference between stocks and currencies is that stocks in general can be expected to grow long-term, while currencies change fast in respect to each other, following the general direction to lower purchasing power because of global inflation.
Because of this, holding currencies for extended periods of time is more risky than implementing a short term active forex trading strategy. Gains and losses realized in currency trading do not necessarily depend on the direction of the market, but are determined by the strategy itself. For example, a strategy built to trade short in bear market rallies can perform exceptionally well in the current environment with the dollar — but more importantly, it will add a negatively correlated component to the portfolio. Brokers provide a number of ways to implement an active trading strategy, including highly automated online forex trading terminals that have the ability to automatically analyze the market and place orders.
While investing in currencies is necessary for asset diversification and provides many benefits, including protection from loss of the purchasing power of the dollar, it is also not something that should be undertaken lightly. Investing in currencies is not similar to the more conventional forms of investment, and requires a skill set that most retail investors don’t have. This is precisely the reason why investment in currency is not recommended to clients by mainstream financial advisors – they consider it best to be safe than sorry and, frankly, this advice is the best one for many people whose itch to get rich fast overcomes their ability to reason.
However, when used as a diversification and hedging tool rather than a high risk speculative instrument, forex trading has a legitimate place in a portfolio. It is easy to get a first hand impression — any broker will be happy to offer a free forex demo for practice, without any obligations.

4 comments:

Crazy Maniac said...

follow sukses sob. d tnggu follback nya. :D

Keynote Capitals Ltd. said...

Online trading of stocks and options has opened up the world of trading for many investors. More and more people start
Online share trading as a means of earning extra income or even turn it into a full time living not only in India.

Aarav Sharma said...

Excellent site, keep up the good work my colleagues would love this. I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say I’m glad I found your blog. Thanks
Value investing

Aarav Sharma said...

An interesting discussion is worth comment. I believe that you should write extra on this topic, it might not be a taboo subject however generally individuals are not enough to speak on such topics.
Learn Stock Market

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