Recognize the risks.
Buying and selling foreign currency is a fraught prospect, even for expert investors. Many investors use leverage, the practice of borrowing money to help them buy more currency. For example, if you wanted to trade $10,000 of currency, you would probably borrow at a leverage rate of 200:1. You could deposit as little as $100 into your margin account. However, if a trade goes sour, you may end up not only losing your own money but owing your broker a great deal more than you might on stock or futures trades.
- Additionally, it can be difficult to manage how much currency to trade at any one time and when to do so. Prices of currency rise and fall rapidly, sometimes within hours.
- For example, during one 24-hour period in 2011, the US dollar dropped 4% to a record low against the Japanese yen and then rose 7.5%.
- For this reason, only about 30% of "retail" trades -- the kind that individual currency investors make -- are profitable.