- January 6, 2022
- Posted by: admin
- Category: Learn
HOW TO INVEST IN FOREX TRADING: Over the years, several investment strategies have been created through the advent of the internet and its successful usage in the financial industry—one of the most popular investment strategies in Forex trading. The reason for its popularity is that most people are beginning to rely upon it as a secondary source of income which also yields a lot of profits (all things being equal).
Forex is an acronym for “foreign exchange.” It is also called FX for short. Forex occurs in the foreign exchange market, where currencies are constantly exchanged. Over time, the forex market has become one of the largest markets in the world. The different trades that occur in the market affect importation and exportation prices. For example, the cost of clothes imported from China will be significantly affected if there’s an upturn or downturn in the foreign exchange market.
If you’ve ever traveled to another country, you must have exchanged your local currency for theirs to aid easy transactions when you get there. Well, that is what forex trading is in layman’s terms. A forex trader buys one currency and exchanges it to gain profits. The value of the currencies in the foreign exchange market is constantly fluctuating depending on their supply and demand.
According to the Bank for International Settlements, as of April of 2019, the daily trading volume for Forex reached $6.6 trillion. The daily trading volume is expected to reach an all-time high by 2025.
The foreign exchange market is always open for 24 hrs, five and a half days a week, and there is no central marketplace. Forex trades are conducted over the counter (OTC) digitally. Hence, this means that all transactions are conducted online through various computer networks with the sole aim of connecting traders. The major centers of Forex trade in the world include Hong Kong, London, Frankfurt, New York, Paris, Singapore, Sydney, Tokyo, and Zurich. The time zones of the centers mentioned above affect their market’s opening.
HOW TO INVEST IN FOREX TRADING
Ways to trade Forex
There are three different ways to trade Forex, and they include;
- The spot market: The spot market is the most popular way of trading forex. Currencies are swapped, and exchange rates are determined based on supply and demand in real-time.
- The forward market: This market is usually used by experienced traders. In this method, traders enter into a private binding contract that requires them to buy a currency in the future at a preset price.
- The futures market: The futures market requires a standardized contract between two or more traders. The involved parties would take delivery of a currency at a preset price in the future.
How to invest in forex trading
To invest in Forex, you will have to be ready to trade. The logic behind forex trading as an investment is buying currencies that can increase in value in the future and selling off other currencies whose value would decrease in the future.
In forex trading, all currencies are represented by a three-letter code similar to a stock’s symbol. For example, the Dollars is represented by USD. There are over 170 currencies globally, with the dollar at the forefront. For this reason, the dollar is usually involved in a majority of forex trades.
Other significant currencies include:
- The euro (EUR).
- The Japanese yen (JPY).
- The British pound (GBP).
- The Australian dollar (AUD).
- The Canadian dollar (CAD).
- The Swiss franc (CHF).
- The New Zealand Dollar (NZD).
Also, all currencies are expressed in pairs (a combination of currencies being exchanged). There are seven popular pairs: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, USD/CHF, and NZD/USD.
The pairs are interpreted as such:
- The currency on the left is always the base currency.
- The currency on the right is the quote currency.
- The exchange rate is a measure of how much of the quote currency is required to buy the base currency.
- The base currency is always expressed as 1 unit. The quote currency is represented based on the current market trends and how much is required to buy 1 unit of the base currency.
- Whenever there’s an increase in exchange rates, the value of the base currency increases relative to the quote currency. Same as when there’s a decrease.
Steps to trade Forex
There are four simple steps for trading forex. They include;
v Open a brokerage account: There are several Forex brokerage platforms online. All you have to do is pick the most suitable platform of your choice. Some of the best brokerage platforms include AstroFx, Saxo Bank, Allyinvest, and Ameritrade.
v Fund your brokerage account: You can fund your brokerage account from a local bank or another brokerage account.
v Select a currency pair: Currency pairs would be listed on the brokerage site; select one.
v Analyze the market: Forex trading based on emotions or basic predictions never ends well. Hence, you must analyze and research the market for signals. Always check for recent and historical charts of the currency you want to sell, check for indicators and technical analysis.
v Read the quote: Two prices are shown for the currency pairs. The first price is the price at which you can sell the currency, while the other is the price at which you can buy the currency pair. The difference in value between prices is the amount the brokerage charges for the trade and is known as “Spread.” Spreads vary between brokerages.
v Select your position: You can select either a buy or sell position. When you choose a buy position, you depend on the increase of the base value as compared to the quote currency. However, when you select a sell position, you believe that the base currency value will drop relative to the quote currency. You can decide to take profits and close your position whenever your position moves up.
Forex trading has all it takes to improve your investment portfolio, but it also has the power to mar it if not done correctly. There are risks involved in forex trading that can only be mitigated when appropriately managed. The information written above is the first step towards forex trading, understanding what it means and how to trade. For more information on Forex Brokerages and risk management in Forex, visit Croft Financial.