How to invest in forex
Understand risks and processes before investing in the forex market
One type of investment that many people are interested in is foreign currency exchange, called foreign exchange. The concept of forex trading seems fairly simple, but in fact, success requires more knowledge and practice than investors would expect.
Before investing in Forex, carefully evaluate your financial and emotional risk susceptibility.
What is the Forex Market?
Basically, the foreign exchange market is the largest and most liquid market in the world. Where currencies are traded-can exceed $ 5 trillion per day.
When trading in the forex market using brokers or trading makers, you basically trade according to how one currency will behave against the other. If you think the euro will rise against the US dollar, you will buy EUR / USD. On the other hand, if you think the euro will fall compared to the dollar, it will sell EUR / USD.
Making money is based on the difference between the buying and selling prices of a currency pair. Therefore, you must overcome the spreads before you can profit. After the spread is guaranteed, the profit or loss is exceeded.
Each investor needs to know how to read and trade foreign exchange quotes.
As mentioned, forex trading is done in pairs. The first currency listed in the pair is "base" and the deal takes into account what you think. The world's most traded EUR / USD allows you to trade euros in relation to the dollar.
Probably buy EUR / USD as you might think the euro will rise against the dollar. However, I think the US dollar will rise compared to the Canadian dollar, so I buy USD / CAD too. In this situation, one transaction assumes that the dollar will be lost, and the other transaction assumes that the dollar will be paired.
When investing in the foreign exchange market, it is important to evaluate each pair and trade accordingly.
It may take a while to get used to trading forex, so it's a good idea to find a platform that offers demo accounts. Practice moving on to the demo account and get a feel for when to buy and sell and how the platform works before putting your money at risk.
One of the realities of investing in forex is that your profits will be small. Even if you overcome small spreads, your profits can still be coins at once. Forex quotes are made in hundred cents, so it is difficult to get a big profit without trading a lot
To buy more currencies, you have to use leverage. That is a margin transaction. For example, if you trade with 200: 1 leverage, you can set aside $ 10 in your trading account and access $ 2,000 in currency. The ability to buy with margins can increase profits.
The downside, however, is that leverage increases losses. Lower the leverage to reduce the likelihood of losing more than you can handle. You need $ 40 to control $ 2,000 at 50: 1 leverage, but you need to limit some losses.
The currency market moves so often, and transactions are almost always there that it is easy to make and lose a lot of money. Understand the risks before you start. People have lost everything by trading margins in the foreign exchange market.
If you are not sure about your trading ability in the foreign exchange market, you can decide to use foreign currency trading funds or ETFs. However, these funds are still speculative. Some experts believe that using stock and bond ETFs is more risky.
You can find currency ETFs that track specific currencies for different currencies or currency baskets. For example, the CurrencyShares Euro Trust (Ticker: FXE) is higher when the euro is going well. You can also get a boost when the US dollar falls.
Currency ETFs allow you to add exposure to the foreign exchange market without actually trading. Instead, buy ETFs from the stock market and add them to your portfolio.
However, carefully consider the allocation of assets before proceeding. Adding currency exposure to many investors can provide additional growth or protect part of the portfolio from market slowdowns, but the risk profile of the portfolio can also change.
For some investors, it makes sense to limit the currency ETF to less than 10% of the portfolio (but some investors are more risk-resistant and may benefit from asset allocation for the currency ETFs higher).
As always, you need to be prepared to lose money every time you invest. Don't trade on the forex market with money you can't afford to lose. Also, carefully consider your long-term investment plan before adding currency in any form to your portfolio.