How much should I invest in the forex market?

Written by Emerging Market Capital FX (EMCFX.com)

This will depend on the risk tolerance, long-term goals, realistic expectations and margin.

In the currency market there is more liquidity for large gains and losses. Why? The currency market trades $3.2 trillion in volume each day vs. the U.S. Dow Jones Industrial, which would take them 60 days to match the volume. In the currency market we are riding the coat tails of the larger participants i.e. central banks, large governments, bond market and large sovereign buyers that can push the market in a single direction.

The risk tolerance for an investor is different according to each individual goal. This type of an investor can be measured by how sophisticated they are in diversification of multiple investments. There are many types of sophisticated investors who have a complete understanding in risk/reward ratio's, which means they can handle and afford losses. In turn they know they can receive a large gain. These investors would typically use a minimum 20% of their portfolio to increase their assets. This would be considered a conservative diversification.

Long-term goals need to be addressed at the beginning of any investments this can be a 5 year, 10 year or longer. Using a longer term gives you peace of mind by using a discipline trading strategy.

Realistic expectations would be a 1% return each month conservatively with a 12% annual return on investment. This would give you peace of mind.

There are many different sizes in margin, for this topic we will use a 100:1 ratio. This would mean we would be using a $1,000 margin requirement for each unit. For this margin the pip value is $1. Also, using up to 10% of the equity for a discipline trading strategies i.e. entry points, scalability, and exit points. In order to trade effectively and to have a conservative trading strategy a minimum $100,000 investment for this type of margin would minimize the risk exposure.

In summary, the currency market is the most liquid market based on the margin requirements. The sophisticated investor can handle and afford losses to reap a large gain. Long-term goals are in the best interest for the investor for peace of mind. Realistic expectations should be addressed at the beginning. A complete understanding on margin requirements will help minimize risk exposure for long-term gains.

2010 EMCFX

How much should I invest in the forex market?

By: Mark Baker

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