Thursday, December 17, 2009

Do You Know When to Bail Out?

As much as you have probably heard how lots of people struck it big in the foreign exchange market, you'd also definitely have come across the numerous horror stories from people who lost a lot of cash very fast.

Depending on how doubtful you are you could either take these horror stories very seriously, or not seriously enough. Either way the fact of the matter is that many folks do end up losing cash in the foreign exchange for a particularly simple reason: they don't know when to quit.

To illustrate what we mean, let's go over a fast example. Say you have US$ 100,000 that you need to invest in the forex market. That's no small amount, and you figure that if you pick the right investment, you could really make money.

So you glance at the market, and feel that using your US$ 100,000 to buy Aus$, which is at present being sold at 1.4244 Aus$ per US$, would be an excellent idea since it seems to be rather high and the Australian Dollar will probably pick up shortly.

With that, you purchase into that currency, and you presently have Aus$ 142,440. Great!

Unfortunately, this is where things begin to go wrong. Instead of the exchange rate improving, it actually does the opposite, and after 24 hours you find that it is now 1.4544 Aus$ per US$. At about that point, if you were to sell you'd end up losing a ton.

instead of selling and ending up losing, you decide to wait and hope that it improves. Come the day after though, you find that the exchange rate has fluctuated in the incorrect direction again, and is now 1.4554 Aus$ per US$.

At this stage you figure that it isn't going to get far worse, and so you choose to hold for a bit more. But what if it gets worse? What if it hits an all time low and you're stuck with the possibility of losing over half your investment if you sell your Aus$? How long are you going to hold on to that currency though?

See, this is the issue with not knowing when to quit. Ideally, a savvy investor would have defined a stop order right at the start, potentially for $1.4344 Aus$ per US$. That way, the second the market commenced going the wrong way, you'd sell and be out of it.

Sure, you'd still lose some money, but it's far better than losing more than you ever expected.

unfortunately, many still finish up doing exactly what we just discussed in that example, and hold on for far too long, with far not enough reason to do so. End of the day, the choice is yours, but knowing when to give up is certainly one characteristic that may serve you well.

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