Key Points to Consider Before Investing in the Forex Market
There are various ways to participate in the foreign exchange or forex market, the largest market in the world. Investing in and trading currencies are two of them and both have the potential for earning significant profits. But as with any type of investment, forex doesn’t offer investors and traders any guarantees, which is why you need to understand and carefully consider these key points beforehand:
• Trading goals and style
Investing in forex means purchasing and holding a currency long term in hopes that its valuation will appreciate. Trading forex, on the other hand, entails profiting off the fluctuations in the value of currencies which happen on a daily basis. As an active trader, you anticipate these currency price changes. Your hope is that you can take the right position — buy or sell — under certain conditions. Every trader has their own goals which will dictate their trading style. If you want to take a more passive approach, long-term investing in currencies is more appropriate. But if it suits your lifestyle, you can build your skills in active trading and make small profits short-term.
There’s a significant amount of risk in trading or investing in forex as it’s dependent on a lot of factors. For instance, Reuters reported that the coronavirus has caused dramatic price swings in global currencies such as the US dollar and the Japanese yen. This kind of volatility can raise the potential for profits or losses depending on how an investor perceives and manages risk. Reducing your position sizes, implementing stop loss orders, and decreasing holding periods in volatile conditions can be effective in minimising your exposure to risk.
• Currency Pairs
Forex is traded in twos which makes choosing the right pair of currencies a critical step. As a general rule, currency pairs with high liquidity are less risky than currency pairs that are traded in lower volume. But they’re not always the most profitable. This year, the EUR/USD pairing has been predicted as a safe haven given the global dominance of Europe and the United States. Predictions on the valuation of this pairing, as well as the USD/JPY, GBP/USD, AUD/USD, and USD/CAD can be made with greater accuracy compared to other currency pairs. Investors and traders can therefore take less risky positions and increase their chances of profit.
• Broker and platform
Choosing a forex broker is like choosing a real estate agent to help you buy or sell a property. A forex broker needs to be reliable and easy to communicate with. Low transaction costs and fast trade execution times are also key factors to consider. And with most of the trading activity happening online, you also need to choose a secure and regulated platform. Opt for one that offers additional features, such as demo accounts. FXCM highlights how trading demo accounts allow traders to experiment with real buy and sell prices using virtual money. This can help traders catch mistakes early on and prepare for actual market conditions, when real money is involved.
• Current events
Finally, currency investors and traders need to have an ear for current events as those affect the valuation of currencies. For example, the Exeter Daily lists the different factors that affect the British pound, namely, inflation, monetary policy, confidence in the market, and economic growth. Events like elections or a global pandemic can have a significant effect on the value of the currency as it can cause investor confidence to rise or fall.
The forex market can be very profitable but it can also be very risky. Understanding these key points before you start to invest in or trade currencies can help you build more significant profits and safeguard against losses.
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