Forex investing is somewhat different from forex trading, in that it assumes you are holding positions for a longer period, i.e. weeks or months rather than hours or days. Typically, a trader is in and out of the market frequently, whereas an investor takes a position with a more long-term view.
So if you are trying to make money with forex investing, what are some of the things you need to do to maintain your open positions, particularly during more turbulent times?
First of all, you need to recognize that forex trading and investing is a highly leveraged activity. This means that when you pay a deposit to your broker to trade, you are actually controlling a much greater sum in the market. Leverage on retail forex accounts can vary between 50:1 and as much as 25o:1!
While this leverage is great if the market is moving in your favor, because it allows you to make substantial profits from a relatively small investment, if the market turns against you, you can quickly lose all your gains plus your original deposit and more besides.
So the first thing you should do when maintaining your forex investing position is have a trailing stop. This is an order you place in the market, which is triggered when the price moves past a certain level. Say for example you are long GBP Sterling versus the US Dollar at 1.4650 and the current price is 1.4850, you might have a stop sell order placed at 1.4650 to ensure you don’t lose any more than you initially invested. So if the price does turn and move back down, once it hits 1.4650, your stop is triggered, your sell order is executed and your position is closed. Of course you might want to take some profit before it heads all the way back down to your original purchase price, that is up to you depending upon the strategy you are following.
So the golden rule when forex investing is to always have a stop in the market.
