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 does inflation affect the exchange rate between two nations?

    Understand how inflation can affect foreign exchange rates of a currency and how it is just one of many economic factors ...
  2. How do I use software to make arbitrage trades?

    Understand the meaning of arbitrage trading, and learn how traders employ software programs to detect arbitrage trade opportunities.
  3. What's the difference between bid-ask spread and bid-ask bounce?

    Understand the difference between the bid-ask spread that determines the buy or sell price for a stock and a bid-ask bounce, ...
  4. How do I find out my bank's bid-ask spread for currency conversions?

    Learn how to find your bank's bid-ask spreads for currency conversions, and understand why you should consider alternative ...
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. Fundamental Analysis

    Forex Exotic Currency Trading: Risks ...

  2. Stock Analysis

    Near Tangible Book, Teck Is Worth A ...

Trading Center