Forex Speculation: High Risk for High Profits

The speculative nature of the Forex market is owed to a number of factors ranging from market volatility to leverage and more. Despite this, Forex speculation is the trading style of choice for most retail traders due to low entry barriers and high potential returns.

Forex Speculation and Market Volatility

A speculative trade, by definition, is one where a trader takes on a high level of risk hoping to make a large profit in a short time span. There is no other market that meets this definition quite as well as the Forex market, as it is one of the most volatile in the world.

The volatility of the Forex market is due to a number of variables included the large volume of trading, over $4 trillion per day, and the market’s susceptibility to economic data. In fact, a lot of Forex speculation is done during news releases exactly for this reason because the Forex market exhibits the biggest short-term movements during and after economic data releases of any financial market in the world.

The market has been known to move hundreds of pips, depending on the currency pair and the information released, in as little as a few minutes. And many traders take advantage of these movements and make large profits. However, these types of trades also carry significant levels of risk which is why it falls clearly into the category of Forex speculation. The market can move in either direction and if a trader is caught on the wrong side of a trade, they can find themselves losing hundreds of pips instead of making a profit.

Forex Speculation and Leverage

Another reason Forex trading carries so much risk is due to leverage. The latter allows traders to make a significant return, even if their disposable trading capital is insignificant. In fact, a successful trader can turn $500 into $100,000 in less than a year, with no more than a 2% drawdown on their account and a 2% daily profit which equates to approximately 10 pips profit per day. And this is all owed to leverage.

Leverage is what makes Forex speculation possible because with it a trader with only $100 can place trades worth anywhere from $2,000 to $20,000 and in some cases even more, depending on the leverage offered by their broker. The problem is that while it can be extremely profitable because a trader keeps the profits made with the borrowed capital, he or she is also liable for the losses incurred.

Forex Speculation and Risk Management

While Forex speculation by definition carries a high level of risk, this doesn’t mean it is a form of gambling simply because traders make informed decisions when it comes to opening positions. However, this doesn’t mean that the market is predictable and you will have the same results every time.

On the other hand, a good trader will also employ good risk management strategies to minimize their risk as much as possible. Risk management usually refers to the maximum loss you are willing to incur on a trade. Many traders use a certain percentage to determine their exposure so, for example, if their maximum accepted risk is to lose no more than 2% of their account balance on a trade, they would not trade with more than 2 standard lots on a $1,000 account and would set their stop-loss at 10 pips.

There are many risk management techniques you can employ to minimize your risk while still profiting from Forex speculation. As long as you understand that it isn’t gambling and you ensure that you make fully informed decisions, there is no reason for you not to make a decent return with Forex speculation.

Related posts:

1. Forex: Investment or Speculation?
2. Currency Day Trading – How to Minimise Risk and Become a Successful Day Trader