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Active Retirees : Active Retirees Feb-March 2012
42 | www.probussouthpacific.org “The ones you want to stick to are called the ‘majors’,” Douglas says, explaining that, in addition to the AUD/USD, the majors include the euro against the US dollar (EUR/USD), the US dollar against the Japanese yen (USD/YEN), the US dollar against the Swiss franc (USD/CHF), and the British pound against the US dollar (GBP/USD). “That’s where the most liquidity is and, as a result, where the tightest spreads [difference between ask and bid price] are usually found,” Douglas says. Investors have access to a growing number of online platforms tailored to retail (‘Mum and Dad’) traders, and they need to shop around to find the best. Douglas says the key is to find a broker platform that is reliable and will not crash all the time. “In the heat of the moment, you don’t want to be trying to figure out how you close out your trade, you want it all made clear to you,” he says. An investor also needs a strategy to guide their buy and sell decisions. Most strategies fall into one of two broad categories: fundamental analysis or technical analysis. With fundamental analysis of forex markets, a trader buys and sells based on macroeconomic and social factors, such as government fiscal policies and the levels of trade and political stability. With technical analysis, a trader buys and sells based on trends and indicators by examining charts and how currencies have fared in the past. “Technical analysis is fairly heavily represented when it comes to forex trading,” Douglas says. One of the best ways investors can develop and hone forex trading strategies that suit both their goals and personalities is through a ‘demo’ account. Demo accounts behave exactly like real accounts, but use pretend money so you don’t actually risk anything. “Demo accounts (also known as paper trading) are a really good way for people to try their hands at things, test out strategies and just make sure they get comfortable in the market,” Douglas says. Beware the risks Trading in currency can be highly lucrative but also extremely risky. The biggest danger is the use of leverage. Most transactions involving foreign currencies will require you to put down a margin. This will usually be only one or two percentage points of the value of what you have ‘bought’ or ‘sold’. So if you have $1000, you can trade up to $100,000. When you close the trade, the $1000 will be returned to you, plus or minus the change in value of the $100,000. Leverage is a double-edge sword. It gives you the ability to make huge profits, but can also wipe out your account. If you had $1000 and leveraged that up to $100,000, a move against you of just one per cent would wipe out your account. To prevent big losses, stop losses are employed by many forex investors, which guarantee a trade will be closed if a currency sinks below a certain price or reaches a certain high. Prospective traders must remember that successful profit making is achieved through small incremental wins and that only a minor amount of one’s savings, particularly for retirees, should be dedicated to it. •• gLoSSAry foreign exchange swaps: the purchase and sale of identical amounts of two currencies – although they have different value dates. Contracts for difference: a contract between a buyer and seller that specifies the buyer will pay the seller the difference between an asset’s current value and its value at contract time. However, if the difference is negative, the seller pays the buyer instead. Spot trading: an agreement between a buyer and seller to trade currencies at an agreed price for settlement on the spot date, which is normally two days after the trade date. options: a contract which specifies that a buyer can purchase an asset in the future with a reference price set. The buyer does not have to purchase the asset, but the seller must comply if they do. The price of the transaction will be the difference between the reference price and the value of the asset. forwards: an agreement to purchase an asset at a future date, with the price set at the time of the agreement. finAnCE Thinkstock
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