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What Investors Should Know About Foreign Exchange

ORLANDO, Fla., Jan. 28, 2013 /PRNewswire/ -- The global economy is still trying to recover from the 2008 crash as we grapple with setbacks like the U.S. fiscal cliff and the ongoing European debt crisis. Meanwhile, investors battle to find worthwhile returns on their money.

But the U.S. Federal Reserve has pledged to keep interest rates at an all-time low for the foreseeable future, squeezing returns on bonds and fixed-income instruments. And the manic-depressive bull market in stocks is making equities investments look somewhat muddled.

Given the current financial landscape, it's only natural for private investors who actively manage their portfolios to explore foreign exchange, or forex, as a viable investment.

Forex trading for a balanced portfolio

"Forex lets you diversify your portfolio or hedge current holdings to better manage overall market exposure," says Alfonso Esparza, who is a senior currency strategist with OANDA, a global foreign exchange services firm. "While not for the faint of heart, investors with greater risk tolerance may find that forex offers attractive benefits."

As Esparza points out, forex is the largest market in the world, estimated in the latest Bank for International Settlement (BIS) survey to account for more than US$4 trillion in daily turnover – bigger than both the NASDAQ and New York Stock Exchange combined. Such massive trading volume tends to create significant price swings throughout the day, which results in volatility and, therefore, more opportunities for investors.

Volatility, however, is a double-edged sword that can also lead to large losses for traders failing to manage their open positions.

Trader education: learn about forex market fundamentals

"If you accept the risks inherent in a volatile market like forex, and you're prepared to study the fundamentals and learn about what moves exchange rates, the upside potential can be enormous," Esparza says. "But anyone who believes trading forex requires little effort or is an easy way to make money will soon find the opposite is true."

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