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The Effect Of Forex Trading On An Global Economy
2018 Economic Research
Among the biggest financial markets is the forex market. This market experiences huge volumes of trade on a daily basis. The market functions just like the stock market, although the commodity of exchange, in this case, is currency. Profits are earned from the discrepancy between the exchange rates of the currency. The rates themselves are influenced by a country’s economic strength. The symbiosis between the economy and currency trading is thus an important part of the forex market. There are indeed other factors as well in the forex that must be considered when analyzing the effect of forex on the economy.
The following is a breakdown of the character of the forex market and its effects on the economy.
Key Sectors of the Market
In any given economy, the two sectors in the forex market are the retail sector and institutional sector. The retail sector is basically made up of individual small-scale traders. This market has no major impacts on the economy. The institutional market, however, has some key effects on the economy. This sector is composed of all the big financial players that shape the economy. Big institutions are responsible for lending and thus influence businesses in the economy. The economy depends on the demand and supply forces at the institutional level to thrive. While there is no direct influence of this market to the economy, the ramifications of trading in the market can be felt in the economy.
The Purpose of Trading
The forex market is solely responsible for facilitating international trade. Currency exchange enables institutions to do business beyond the borders of the nation. Just like in any other market, a strong currency has more value and is able to dominate in the international trading market. The activities of traders in the forex market also influence its prosperity. When there is an uncertainty in the market, speculators in the forex market cause price adjustments.
This, in turn, affects the profit margins of the traders.
Long-Term Effects of Forex on the Economy
Forex trading affects the economy in both the short-term and long-term. Economic activity determines the demand for a particular currency, which in turn has an effect on the value of the currency. If the currency has a constant demand due to increased tourism or increased earnings from manufactured goods, then the economy is bound to grow. Sometimes, adjustments in the short-term become necessary especially when the demand has been dormant for a long time. Countries that have consistently focused on adding value to their goods attract good revenues in the forex market. In overall, the forces of demand ultimately determine the forex market’s performance and thus the economy as a whole.
Forex and International TradeAs reported by bestonlineforexbroker.com, international trade highly influences forex rates. The demand for a particular currency in the forex market determines the benefits a particular nation gets from forex trading. When two nations trade, they must agree on a particular currency of exchange. The currency chosen for exchange attracts an increase in demand and thus translates to an increase in revenue for the traders involved in its exchange. Strong nations whose currencies are high in demand thus get a lot of revenue from the forex market.
How to Rebuild Your Portfolio After Huge Losses
5 Tips By a Professional Economist
This article is being written based on not only personal experience, but also experience of seeing this all the time in the industry. We have all been there, speculating on a penny stock that keeps dropping then the old "average down" in hopes that it will run 2-300%. The next thing you know, your trading account has been wiped out 20% or more. How did this happen? What mistakes did I make? How do I get it all back?
I have outlined a few steps below that have worked for me in tremulous times and some ideas that can help you get your portfolio back to looking healthy again.
#1 - Stop Trading
There are no definitive answers to the questions above but there are some solutions. As advised by Thinkmarkets, the last thing you would want to do is panic. Take a step back and cease trading until you can get your head on straight. Suffering huge losses in unnerving and can cause you continue racking up the losses as you start making fast rash decision that will not only effect you but your portfolio as well.
#2 - Reevaluate the Situation
Once you have stopped trading, go through your transaction history and start evaluating your trades. Try to pinpoint the mistakes you made and what went wrong. Did you forget to set a stop loss? Did you close your position out too soon? Did you put up to much capital? You must identify what you did wrong, if you cannot locate where you went wrong, seek help form an adviser or from your brokerage firm. Many offer free help seminars these days.
#3- Have a Plan of Action
Ok, so you lost significant gains and now you looked over the transactions and have identified why you took that huge hit. The next step would be to have a plan of action. Think about if you want to continue trading or if you want to sit in cash. Do you need a time frame, a "cooling off" period? What will you do to combat losses? What happens if you suffer losses again? All of these should be questions you ask yourself before you step back into the game.
#4 - Start Off Slowly
If you decide that would want to get back in the game and start recouping some of those losses and rebuildi your portfolio, start off slowly. Don't just jump back into a huge position right away, especially if you cannot afford to take any more losses. Starting off slowly will help you get your swagger back and start making better, rational trades again.
#5 - Win the Small Battles
You don't have to hit a home run every time you step up to the plate. Taking small gains here and there is a great way to boost your confidence. Start getting back in the game and rebuilding your portfolio. This strategy allows you to see what works and what doesn't when it comes to your own investing styles and habits.
As discussed, here are the 5 step to rebuilding your portfolio:
- Stop trading - Giver yourself time to cool off
- Reevaluate the situation - Go over your transactions and see what mistakes you made
- Have a plan of action - Decide what you want to do next and map it out
- Start off slowly - Start with small trades
- Win the small battles - Take profits, write down and analyze what you are doing right
Once you get to step 5, you can analyze your transactions and start seeing what works for you. If you are still suffering losses, then you might be making to many speculative risks.
Have a professional analyze your trading patterns and see if they are right for you.
Trading on Margin
I would never recommend anyone, from the most novice to serious day trader ever trade on margin. Whenever you trade on margin, your are risking funds that you do not have. Markets can move one way or another in a heartbeat, and you do not want to be left holding the bag when your broker comes through with a margin call.
In conclusion, these are just a few steps that I have learned to take after taking heavy losses from placing bad trades in my portfolio. The most important for me is taking a step back and re-evaluating the situation. This will give you time to not only get your head right, but also decide if trading is right for you. I have had trader friends that have taken months or years off from trading only to get back in the game and become successful.