Despite being a relatively small offshoot of larger Forex markets, retail Forex trading is turning into one of the fastest growing segments of Forex markets. It involves speculation on the exchange rates through numerous trading platforms. In the past, Forex markets were open only to a select few, mostly large financial institutions. However, as the markets grew and technology improved, a new trail was blazed for the brave Forex traders to make their fortune. Online retail Forex trading via specialized platforms started in 1996 and has not stopped since.
How does retail Forex trading work nowadays?
The process has been greatly simplified since its humble beginnings in the late 1990s. It now involves only a short series of steps and you’re ready to begin trading. First, you need to log in to the platform (such as the most widely used MetaTrader 4) of the Forex broker of your choosing (see our recommendations here), in order to register and deposit your initial funds. From there on, you can take long and short positions on currency pairs and profit from the exchange rates. Your broker may or may not be your counterparty, but he or she will certainly offer you lots of leverage. You can use that leverage to borrow money, which you invest in currency pairs and repay once trade has been concluded.
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If you’ve done your part right, the proceeds should easily cover all your expenses and net you a far greater profit than you could otherwise make. This high leverage means you can compete in the big league and not lose to any heavyweight only because you don’t have as much money to trade with. Sure retail trading on margin opens up many possibilities, but it also leaves you exposed to market fluctuations. Remember, the profits need to cover the borrowed sum, the interest, your investment and on top of that, make a profit. It is kind of ironic that the whole reason you’ve entered into this arrangement in the first place comes last at the end of any deal, and if said deal falls through, it is the first thing to go.
Speaking of things that could go wrong, Forex fraud is an ever-present concern these days in retail Forex trading. You need to pick your broker carefully. They all promise a return that is many times what you’d invest. However, in unregulated markets, there is no guarantee that the broker will actually place the money where it was supposed to go. They could simply divert it to their own account and play dumb. There are many types of fraud, but what most of them have in common is that they happen in unregulated markets, where traders have no recourse except to move on.
It never hurts to exercise caution in retail Forex trading. Aside from using trusted platforms and regulated markets, there is something called “automatic stop loss”. This means your trades cease if your losses reach a certain amount so you don’t lose any more money, but you also get a margin call and need to deposit additional funds to continue.