There are a number of rewards that come with investing in Forex, which is why there are so many people discovering it and taking part in it. There is also a thrill to it because this is a market that is very fast moving, which means it can be rather suspenseful and exciting at times. Because this is a worldwide market that operates 24/7, it has somewhat of a learning curve. This learning curve means that there are some steps and tips that you can review before getting started in this “edge of your seat” form of investing.
First of all, it is important to know the realities of Forex investing. Even if you are using software that automates your moves while investing, you need to know what everything means so that you can command the software what to do.
Pros and Cons
One of the primary benefits of Forex investing is that it is a very large and liquid market. This is the largest and most liquid market in the world with a daily volume that exceeds $4 trillion. Another benefit is that Forex investing can be used as a way to diversify a portfolio and also move away from the risks that surround the U.S. dollar as an asset.
As for the risks, this is a high leverage type of investing. The foreign exchange market does not move in large increments. The increments are so small and they are called “pips.” A pip is as small as it sounds, as it is the movement on the right side of the decimal point when looking at currency value. This small movement is why there is such high leverage and a great deal of risk for those that are investing directly. Investors should consider risk management techniques to help get the risk under control, which will result in better long-term returns.
Pips and Margins
First of all, every currency has an abbreviation. For instance, the Australian dollar is abbreviated to AUD and the U.S. dollar is abbreviated to USD. There are many terms to know, but there are some that you will deal with more times than others. As mentioned before, there are pips. Pips are the unit of measurement that expresses the change between two currencies. For instance, the Euro vs. the U.S. dollar (EUR/USD) may move from 1.2248 in value to 1.2249. That is .0001 USD rise, which is one pip. Most pairs go out four decimal places, but there are times this may not be the case, such as with the Japanese Yen that goes out two decimal places. If a broker quotes currency pairs beyond 4 decimal places, they are quoting fractional pips, which are referred to as pipettes.
Another term that you need to know is “margin.” Margin trading is when a margin account is set up with a broker. This account is very similar to an equities margin account where the investor takes a short-term loan from the broker in order to invest. The amount of the loan is equal to the amount of leverage being taken on by the investor. Before the investor can make a trade, money must be deposited into this margin account. The amount that is deposited is determined by the margin percentage that the broker and the investor agree upon. For accounts that will be trading in at least 100,000 currency units, the margin percentage is no more than 2%. This means if an investor wants to trade $100,000 in currency, $1,000 will need to be deposited into their account. The broker provides the other $99,000. No interest is paid, but it is when the investor does not make their position before a specific date or “delivery date.”
In addition to the information you already have, you will need to prepare yourself because there are some difficulties associated with Forex investing that make it rather risky compared to other types of investing. In order to become successful without the help of anyone, you have to educate yourself for at least two years. This is not something that everyone can fulfill. Only intelligent, self-confident, and prosperous individuals can afford to invest time and money into Forex trading without any assistance from the experts. The good news is that there are many online resources that can help you in your investing. Many of the courses online cost money, but there are Forex investors that find these resources valuable.
You can also do what many have done and that is buy automated trading signals. This is the software that was mentioned above. There are plenty of trustworthy software programs that automate trading signals. You do have to know how to use a computer, however, and be able to understand how the software works so you are not spending more time learning the program than you are actually investing. There are pros to using software and they are the ability to better keep track of the fast-changing Forex market and the ability to manage your portfolio on your own. However, the cons are the fact that not knowing what is happening can result in major financial loss. This tends to be a common result when the program is too complicated. If this method is too complicated, then it may be worth exploring other methods of investing in Forex.
Ways to Invest
Exchange-traded Funds (ETFs) are one of the ways to invest in foreign currency and it is an easy way. These funds purchase and manage a portfolio on behalf of the investor and it is filled with currencies. The benefit is that there is not as much leverage-related risk and the purchase occurs through a stock broker instead of a foreign exchange broker or do-it-yourself software.
There are companies that provide ETfs that are designed to help in Forex investing. Some of these companies offer investors ways to make leveraged bets for or against popular currencies. Investors should read the prospectus of the ETF before they invest in order to know what fees will be charged, as well as other important information.
If you wish to invest directly, then you can work with a foreign exchange brokerage. The brokerage will accept an initial deposit. The deposits are typically between $300 and $500. You can then purchase your currency with margin levels that are as low as 50:1 to as high as 10,000:1. It is important to keep in mind that the greater the leverage that is received via the margin means that the volatility grows and so does the risk of loss. It is best to start out small and up your game as you get used to Forex investing and start seeing returns that you can use to take riskier investments.