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Army March 3, 2011
Many ADF personnel
travel the world through
deployments and person-
al travel and are probably
very experienced at managing for-
eign currencies. However, trading
foreign currencies, or forex trading,
is a very risky form of investing. In
one trade your investment can turn
into thousands of dollars in debt.
What is Forex?
Foreign exchange trading is the
practice of buying and selling foreign
currencies to make a profit. Foreign
Exchange is also known as Forex or
An example of the simplest form
of foreign exchange is when you're
deployed overseas and sell Australian
dollars to buy foreign currency. When
you return home, if the value of the
Australian dollar has gone down rela-
tive to the currency of the country
you came from, then you will get
more money back per dollar.
Foreign exchange markets work
in a similar way but on a larger scale.
Dangers of leverage
Most forex trading products are
highly leveraged. This means you
only have to pay a fraction (for exam-
ple, 0.5%) of the value of your trade
up front, but you are still responsible
for the full amount of the trade.
For example, a $50 invest-
ment could let you place a $10,000
forex trade. If the value of the trade
dropped by 0.5% to $9,950, you
could lose the original $50 that you
invested. If it fell further, you may
have to pay much more.
You could even be liable for the
entire $10,000 -- that's 200 times your
original investment -- unless you close
out the trade before the losses become
Risks of forex trading
To successfully trade in forex you
need to understand the economic con-
ditions of each country whose cur-
rency you are trading, and how those
conditions affect the relative value
of those currencies. This is extreme-
ly difficult because so many factors
come into play including politics,
economics and market forces.
There are many providers and
types of forex trading products. Some
that you may see advertised are forex
contracts for difference (CFDs), mar-
gin forex trading, spot forex contracts
and forex options.
Different types of forex trading
products involve different risks. If you
are looking at Forex CFDs, down-
load ASIC's investor guide, Thinking
of trading contracts for difference
(CFDs)? from www.fido.gov.au
There are also many software pro-
grams available, which claim their
programs can let you know when to
make trades online in a simple way.
Remember, forex trading is never
simple, so don't rely on a trading sys-
tem that tells you it is.
Also be wary of marketing prom-
ises that suggest that by using a par-
ticular product you will get access to
better exchange rates.
Trading in international curren-
cies is never easy and requires a huge
amount of research and monitoring
if you are to be successful. Even the
most skilled and experienced inves-
tors cannot reasonably predict curren-
cy movements. So before investing in
forex or any other investment, always
consider our six steps to investing
between the flags.
1 -- Understand yourself.
2 -- Understand investments.
3 -- Develop an investment plan.
4 -- Decide how to invest.
5 -- Implement your plan.
6 -- Monitor your investments.
For more information on investing visit ASIC's
consumer website, FIDO at www.fido.gov.au
or call 1300 300 630. E-mail ASIC with topics
that interest you at ADFcolumn@asic.gov.au
Forex market risks:
You could lose more money than you put in,
when the trade is leveraged.
There is a huge volume of trading.
You're dealing with foreign traders and laws.
Markets are open 24 hours a day, five days
a week, so it's hard to monitor.
Markets are impossible to predict because
so many factors affect exchange rates.
To trade successfully:
Have extensive trading experience in shares
and other investments for a long period.
Know how forex works in detail.
Read the product disclosure statement and
discuss it with your financial adviser.
Have the financial capability to afford to lose
more than the amount you invested.
Beware the foreign threat
Forex trading can look
attractive, but it's extremely
risky, according to ASIC
chairman Tony D'Aloisio.
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