FOREX

by Costas Chryanthou

Created on: July 19, 2008   Last Updated: April 18, 2009

The investment of foreign exchange and commodity trading are both risky investment products. Physical or speculative trading varies in that a person say a farmer who has 100 tonnes of wheat can sell this to the market or to an overseas customer. This varies from the not so specialised speculator who is gambling on the price rising or falling to make a return. The farmers margin if the price continues to rise may be greater on a percentage basis than that of a commodities trader.

Both types of physical ownership and money based trading of foreign exchange and commodities trading carries a high level of risk. This is said as the market moves both upwards and downwards. I would say that the movement on foreign exchange is much more volatile than the movement in the price of gold, coffee, silver, wheat, soya and other product commodities. A trader risking 50 pips on the foreign exchange markets can see his or her investment disappear very fast indeed if the market moves unfavourably. This is based upon the trading activity and volumes carried out on a daily basis. The foreign exchange rates is an area that covers business, financial movements in capital and economic data flows. The speculation therefore encompasses a much bigger pool of trading than that of food and metal prices.

The risk of investing in a contract of gold will tend to be far lower as the daily movement does not tend to vary much based on pip movement. The price of gold say may move only between 1-10 United States Dollar. So losing 10 pips or winning 10$ per pip is not that great a risk overall. The foreign exchange on the other hand where the Dollar trading against the Euro or against the British Pound, often moves from 50-200 pips. Therefore the answer as to which investment in riskier is pretty much conclusive from here alone. The movements in foreign exchange rates can vary greatly from minute to minute. An individual foreign exchange trader might be looking at the software one minute with a profit of $10,000 and then quickly the profit is lower, or most likely at a loss. The markets do not wait for no man or woman.

Having said the obvious so far, I feel that commodities trading might be a lower return and slightly less risky choice of trading. Though in buying a commodity it too involves the added risk of exchange rate fluctuation. A small loss or where there has been no great ground made on the commodity prices themselves might be outweighed by the fluctuating exchange rates. The commodities priced in dollars for overseas investors they are faced with a double risk factor. Either they can win on both aspects of risk in the commodity price or on the exchange rate, or one part makes a small transaction profit which is undone once the commodity translation of the funds returned has taken place. Either method will lead to perhaps many sleepless nights and many nerve racking moments. The price and market volatility involved in being able to make a profit on foreign exchange rates is by a riskier asset group.

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