Learning to invest in Forex is a complex undertaking with myriad facets. Education is key here, as is the capacity to rein in yourself (or letting yourself go when circumstance demands it!). In order to grow sure of yourself, you need to know the basics, have the acumen of economists and analysts who are comfortable with charts. You need to know your trading platform like the palm of your hand. Your trading journal has to be an A-Z compendium of strategies that you change and interchange as market play demands it. And you need to be you, in your skin. The psychological pressure is great, especially if you are a small investor with no money to throw away. Even those with dispensable money do need to be firm with their inner demons. But our approach in this piece would be to learn to handle Forex pairs in the context of investment.
Examining the exchange rate for the currency you wish to buy based on the currency you wish to sell
Observe how the values for your chosen Forex pairs have fluctuated over time.
Forex rates are quotes in pairs of currency. The exchange quote shows how many units of currency you will get on the basis of the currency you wish to sell. For instance, a USD/EUR quote of .91 implies your receiving 0.91 euros for every dollar you sell.
There is a periodic fluctuation in currency values. Even a news item might cause considerable upheaval. Therefore, do ascertain that you understand that ratios between currencies are constantly changing.
Developing a trading strategy
Suppose you aim to profit from your transaction. In that case, your strategy should involve buying a currency that you expect will increase in value (base currency), using the currency you think will depreciate (quote currency).
For instance, if you deem currency A, currently $1.50 will appreciate, you could buy a call contract for a specific amount of that currency. If the value appreciates to $1.75, you are in the money!
Evaluate the likelihood of significant changes in currency values. The stability of a country’s currency is directly proportional to the economic health of that country; factors impacting a currency’s value include interest rates, inflation rate, political stability and public debt; indicators showing the importance of country’s currency is about to change include changes in factors like Purchasing Managers Index and Consumer Price Index.
Be aware of the risks
Buying/selling foreign currencies is a risky prospect. This holds for expert investors as well. Many investors use leverage. For instance, if it were your goal to trade $10,000 of currency, you would possibly borrow at the 200:1 leverage rate. You could deposit as little as $100 into your margin account. Nevertheless, if a trade fails to pan out, you may end up losing not only your own money but owing your broker a great deal more than you might on futures or stock trades.
Furthermore, it can be challenging to manage much currency to trade at any given point in time. As a result, currency prices rise and fall – all within the span of a few hours.
For instance, during one day in 2011, the US Dollar plunged 4% against the Japanese Yen, then rose 7.5%. This is why only a little over a quarter of “retail” trades see any profit.
Get cash in your local currency
This will have to be converted to other currencies. Free up your cash by selling your other assets. For example, you could sell stocks, bonds, or mutual funds. Or you could take money out of a checking or savings account.
Locate a Forex broker
In the majority of cases, individual investors use a brokerage service to place their foreign currency transactions.
Due diligence is called for while you go looking for the right broker. Look at the quality of the broker – and if the firm is not properly regulated, do not under any circumstances come to any understanding with them.
Find out brokers that offer tight spreads
Forex brokers do not charge fees or commissions as traditionally understood. Rather, they make money off the spread. A spread is the difference between how much a currency can be sold for and bought for. For instance, a broker that will purchase a US dollar for 0.8 Euros but sell a US dollar for 0.95 Euros has already nearly 0.15 Euros.
Prior to signing up for a brokerage account, scrutinise its or its parent company’s website, ensuring it is registered with the Futures Commission Merchant, and regulated by the Commodity Futures Trading Commission.
Start placing currency transactions with your broker
You ought to be able to track the progress of your investments with visual software, among others. Refrain from ‘overtrading’ or buying too much currency at once. We recommend sticking with investing between 5-10% of your total account balance in any single currency trade.
Observe currency rate trends before plunging into the transaction. Then, going with the trend would be easier and profitable, rather than an opposite course of action.
For instance, suppose the US Dollar has been appreciating against the euro. You ought to choose to sell euros and purchase US Dollars.
Set stop-loss orders
Stop-loss orders are a vital part of currency trading. Upon its hitting a specific price, a stop-loss order will automatically exit a position. This delimits the magnitude of the loss you bear if the currency you purchased begins to plummet.
For instance, when you are buying the Japanese Yen with the US dollar. If the Yen is currently 120, you ought to set up a stop-loss order for a specific price threshold.
We have barely scratched the surface here. Educate, test yourself – see if you are up to scratch! It takes nearly half a decade of dedicated work before you begin to feel investing in Forex is akin to ‘second nature. If you wish your investments in Forex to be fruitful, training yourself with the aid of a good broker comes highly recommended.