One type of investing that has interested a lot of people worldwide is foreign currency exchange or Forex. At its most basic, the Forex market is the largest, most liquid market with trading volumes exceeding 5$ trillion a day. When you invest in Forex, you simultaneously buy and sell currency pairs where making money is based on the spread or difference between the buy and sell price. While the concept of Forex trading seems relatively straightforward, being successful requires more knowledge and experience than one might expect.
Carefully evaluating your own financial and emotional risk tolerance is essential before investing in the Forex market.
How to invest in Forex trading
Unlike most financial markets, Forex has no physical exchange and trades 24-hours a day through a global network of businesses, banks, and individuals. This means that currency prices are constantly fluctuating in value against each other, offering multiple trading opportunities. Here are the steps to start investing in Forex:
• Choose a Forex Broker
To invest in Forex, the first step to look into is finding a reputable Forex broker. Consider the broker’s strengths and weaknesses; recognize their minimum investment in Forex and see what offers each broker has that would cater to your needs and specifications.
• Choose a currency pair
As mentioned above, Forex means simultaneously buying and selling currency, and with over 65 currency pairs to pick, it can be a rather daunting task. However, these pairs are grouped into major, minor, and exotic currency pairs.
Examples of significant pairs are the EUR/USD (Euro – US Dollar), USD/JPY (US Dollar – Japanese Yen) and the GBP/USD (British Pound – US Dollar) currency pair. It is recommended for novice traders to trade with these pairs as they are the most highly sold in the market with lower risks making it the best Forex stocks to invest in. You may move on to minor and exotic currency pairs once you have gained enough experience and would want to experiment.
• Decide on the type of FX trade
There are three ways to trade Forex with City Index Spread Betting, CFD, or Forex Trading. Each of these types has its own particular stakes size. With spread betting, you trade currency per point movement. With CFD, you trade with a quantity in the unit of the base currency. Forex trading allows you to buy lots in the group of the base currency.
• Decide to buy or sell
After picking a market, you will now need to know the current exchange rate, which can be found by bringing up an order ticket in the platform. Each currency pair has a ‘base’ currency (which is the currency on the left) and a ‘quote’ (which is on the right) currency. The action on the base currency is what will result in the quote currency. So when you invest in Forex, you would:
- Buy a currency pair if you predict that the base currency will strengthen against the quote currency.
- Sell a currency pair if you predict that the base currency will weaken in value against the quote currency.
• Adding orders
An order is an instruction to automatically trade at a point in the future when the prices reach a specific level predetermined by you. You can utilize stop and limit orders to help ensure that you lock in any profits and minimize your risk when your own profit or loss risk target is reached.
While this step is not necessary, the high volatility in the Forex markets using and understanding risk management tools such as stop-loss orders can be very beneficial.
• Monitor trades
Once open, your trade’s profit and loss will now fluctuate as the market moves. You can track market movements, see profit/loss updates in real-time, attach orders to open positions, and add new trades or close existing trades on your trading platform.
• Closing your trade
When closing a trade, you do the opposite of opening a trade. If you had begun with buying 3 CFDs, selling 3 CFDs would translate to close. Once you have closed a trade, your net open profit and loss will be realized and immediately reflected in your account balance.
All these steps factor in investing in Forex. Many traders are starting that may have to know about the many strategies online on how to analyze and forecast market movements before they invest in Forex, but the only way to ensure longevity and success is by getting a feel and experiencing the market first-hand.