Foreign exchange market is known for its easy accessibility and high profits which some traders banked upon to become the so-called biggest Forex traders in the world. However, its high-risk potential of trading Forex has axed many professionals because this market doesn’t have any room for mistakes.
It’s a double-edged sword with a tremendous return value that can also turn into massive losses with one wrong move. Learning about trader strategies have earned huge profits could give you some valuable insight.
Understanding Short Selling
A tried and tested move by some of the biggest Forex traders, short selling in layman terms basically means selling securities you don’t own.
For example, if A predicted that the stocks of XYZ Company were about to dip, he could call his broker and ask for 100 shares of the company. Forex terms define this as borrowed stock. Now suppose the 100 shares of the company were valued at $ 100. If the dip prediction persists and stock values do go down, he will then be able to buy the stock at a lower price of say $50 and return his broker the 100 shares.
In the total transaction, he will be able to profit $50 because of his correct prediction.
Hedging: A Necessary Evil
Used by many of the biggest Forex traders hedging is a kind of security that helps reduce losses of an investment. However, in case of no losses, hedge funds become somewhat of a liability.
How does it work?
Suppose you invest in a company’s stock that you feel has growth potential. In such a case, you must also prevent massive losses if you are wrong. To ensure that, Forex traders buy currencies which are inversely proportional to their main investment. This way, even if the primary investment dips, their hedge can help them recover some losses.
The Maverick Move of these Biggest Forex Traders: Currency Carry Trade
In a currency carry trade, Forex investors buy currencies with low-interest rates and convert them into ones with higher interest rates.
Imagine someone bought Euro currency that is offering 0 % interest. If the person converts the Euros into Pounds which offer 6% interest rates, then they will make a profit. In case of a high leverage of around 1:10 between the two currencies, a 65% profit can be made.
Although, with high leverage comes higher risks. If the values of currencies change before the transaction is complete, the potential risk is equally high. This is why traders hedge in order to minimize losses.
Some Mistakes to Avoid:
While these strategies may help one make profits, one should never forget the risks involved. Here are some of the mistakes that could catastrophic results.
Lack of education
Unable to differentiate between long term and short term growth.
Now that you’ve learned some of the basic strategies and mistakes to avoid look up for more information before starting to trade Forex yourself. Remember, knowledge is what made average traders into these biggest Forex traders.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.