Trading online in foreign exchange (forex) is no more risky than dealing in stocks.
That, at least, is the view of Lars Christensen, cofounder and chief executive of Saxo Bank, which offers online currency trading platforms. “In a way it’s probably as easy and simple as [trading] in stocks, if not more simple,” he said during an interview with Gulf News last week. Now days, everybody can have access to relatively easy, instant, trading platforms and the available information.
However, Christensen warned: “I wouldn’t say that it is not risky. But I would say it has good opportunities because as quickly as you can lose money, you can make money. You need to be really careful about your risk management. Education is really critical one here.”
Christensen underscored the importance of getting proper training before starting to trade currency. He recommended that beginners use the education tools available on banks’ websites and attend seminars offered by forex traders and brokers.
“Try with demo and stuff like that before jumping into with something big,” he advised.
The risk lies in the high leverage that is available when trading in currencies. While currencies can be relatively stable, the leverage you can get in forex is so much higher than that in the stock market that the swings become much bigger.
“If you take a leverage of 50 times, it is very, very risky,” Christensen said. “There’s a big probability that you would end up losing money over time. Any small mistake you make will be magnified by 50 times. I say to people: ‘Don’t do that. Take it easy.’
“At least until you know what you are doing, and until you know exactly what the risks are, you should have very low leverage. Maybe you can take high leverage on a small portfolio, if you really believe in an idea. But don’t do it all the time.”
Next, it’s very important to understand if you want to trade short-term and be guided by technical moves; or long-term and base your decisions on economic fundamentals. Based on its economic fundamentals Christensen thinks the Euro is going lower. “If you’re taking the view that the Euro is a weak currency because Europe is in a lot of trouble, and eventually it’s going to go down, I would agree with you. I think it’s going to go to one against the dollar, maybe lower. But that’s a long term view and that could be next year or the year after.
The best traders, Christensen pointed out, are the people who look at the market in the morning, do a thorough analysis to spot the right points, and put in some automatic [trading] positions. They then only look at their positions again in the evening. “Try to not look at the screen all the time, except when [some] wild thing has happened. Because [if you do that] you lose perspective.”
Three top tips
Educate yourself before you do anything.
Always have a risk strategy: a defined amount of money you are willing to lose
Take the long view. If you try to do this as a sprint, you are going to break your leg sooner or later. This is a marathon: it’s important where you are one or two years from now, not tomorrow.