How do you lose money in the Forex market?

By Selwyn Gishen AAA
A:

All trades made in the forex market are made in pairs. In other words, one currency is always quoted against another currency, for example the U.S. Dollar against the Japanese yen or the U.S. Dollar against the euro. When a trader buys the dollar against the yen, he or she is hoping or speculating that the dollar will increase in value, while the Yen will decrease. Conversely, when the trader sells the U.S. Dollar against the Japanese yen, he is speculating that the dollar will decrease in value while the yen increases in value. If he buys the dollar-yen, but the yen increases in value, the trader will lose money, since he now owns dollars which have decreased in value compared with the yen.

A trader can minimize his or her losses by predefining where to exit a position, should the trade not work out as intended. The trader can leave an order in the market with his or her broker, and the order will be automatically executed if the parameters are met. Hence, a trader can decide how much of a loss to sustain before exiting the position. This type of order is known as a stop loss order, and it is considered the most popular risk management tool. Traders who do not leave stop loss orders in the market can sustain large losses if their position moves in the wrong direction, especially if it is a leveraged position. In some cases an account can be so leveraged that an adverse move can cause the trader's account to fall into the negative. (For more, see Place Forex Orders Properly.)

This question was answered by Selwyn Gishen.

RELATED FAQS

  1. How do I create a Forex Range-Bound trading strategy?

    Discover how to create a range-bound trading strategy with forex currency pairs, and learn which kinds of pairs are most ...
  2. How do I implement a forex strategy when spotting a Pennant Pattern?

    Understand the basics of the forex pennant pattern and how to use this indicator to create an effective trading strategy, ...
  3. What is liquidity management?

    Take a look at the different definitions of liquidity, and find out how investors and businesses attempt to reduce exposure ...
  4. What are common strategies traders implement when identifying a Bearish Engulfing ...

    Learn how to spot a bearish engulfing pattern, and learn some of the trading strategies you can implement to take advantage ...
RELATED TERMS
  1. ICE LIBOR

    See LIBOR
  2. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
  3. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  4. Open Position Ratio

    The percentage of open positions held for major currency pairs ...
  5. Indirect Quote

    A currency quotation in the foreign exchange markets that expresses ...
  6. Competitive Devaluation

    A series of sudden currency depreciations that nations may resort ...

You May Also Like

Related Articles
  1. Forex

    Steps To Open An Offshore Forex Account

  2. Fundamental Analysis

    Forex Exotic Currency Trading: Risks ...

  3. Forex Education

    Understanding The Spread in Retail Currency ...

  4. Forex Fundamentals

    How To Calculate An Exchange Rate

  5. Forex Fundamentals

    What Would Have To Happen For The Iraqi ...

Trading Center