Introduction To Forex

By Paul Stafford  

Trading the Forex market in any manner has many advantages over other markets (such as equities). It is highly liquid, very large, almost impossible to manipulate, its volume driven mainly by commercial trade need (not speculation), and the relevant data is transparent and easily available (except trade volume). However, there are some real pitfalls. If we’re wrong directionally and the market finds us, losses can be severe, even at lower leverages. A modicum of volatility is good for trading, as movement is what sustains a market. However, during the last year volatilities have been enormous. With a 24/5 market, you can’t always be there to monitor positions. The use of stops can prevent a blown account, but they also lock in losses, sometimes needlessly.

As we will see, trading Forex with options preserves much of the advantages of trading Forex, and eliminates
some of the downsides:

• There is no leverage in the purchase of options. Sleep at night

• There is no drawdown beyond the premium. Sleep at night

• There is less time involved (no need to monitor positions often)

• Trading with options avoids the paying of interest on leveraged positions- of special interest to Muslim investors following Sharia law, who cannot pay interest (or even receive it on the Carry).

The upside is large and can return multiples of the premium. The main disadvantage to options is unlike a trade in the underlying asset, options are time-limited.