The currency trade business has a lot of associated risks and complexities, and all these should be taken into consideration before going into the business.
Currency trading has been known to take on different meanings. In this case, the purchase and trade of currency on the stock exchange market in a bid to make a profit is what is termed currency trading. This process is also known as speculative Forex trading.
What Investors Gain from Trading Forex
In a day, a total of $5.3 trillion is made in the Forex trade. This adds to why it is the most traded market in the world. It involves speculative work on the direction currencies would go. As a trader, you can choose to take a long or short position on your perception of the currency’s value dropping or rising.
Forex trading pairs currencies together. In the case of Euros vs. the US dollar, the exchange rate change is where a trader makes his profit.
When a trader believes that the Euro will appreciate against the Dollar, his next move is to buy the Euro and make a profit. The purchase of the Euro results in the sale of the dollar with speculation that its exchange rate will rise in value.
If their speculations are verified, with every rise in the exchange rate the trader makes a profit.
After the exchange rate has risen to almost double the price it was purchased, the trader then sells the Euro. This closes the position and provides the trader with a very nice profit.
In the event that the trader’s speculations are disproved, the Euro/USD exchange rate will fall with the Euro dropping in relation to the USD. The trader is left in the red and with a loss as each drop in the exchange rate will decrease their gain.
Share betting involves traders gambling on if a share, index, or currency will rise or fall during a timeline. An example is a trader betting £4 that the Pound will rise by July at 540p. From now till the said date in July, he gains £4 for every time it gets higher than that point and loses £4 if it falls lower. The punter also has the choice to end the bet and seal in his profit before the contract ends.
The difference with currency spread betting and spread betting is that the bet is placed on the exchange rate. The bet on the exchange rate has to be at least £1 per 0.0001 change.
Contracts for Difference (CFDs)
CFDs are imitative products created for use by currency traders. This allows money to be made on the movement of the share price by the traders. In this, the shares do not have to be bought.
In the case of currency, the same applies. Traders get to make money on the progression of the currency without purchasing the currency.
These high jeopardy financial yields let people sell what they do not own in hopes of gaining from the rise and fall of the market. These contracts for difference are usually settled by cash and need a typical 5% to 10% of the contract size.
One of the world’s popular Forex trading platforms is the MT4. The MT4’s city index is highly attuned with expert advisors and offers the lowest spreads on FX pairs in the industry.
Essence of currency trade
With a 24-hour market and approximately 3.2 trillion US dollars made in daily volume, Forex is the largest trading market. There are a number of variations between Equities market and Forex; which are:
- Most firms do not charge commissions- payment occurs only on bid/ask spreads.
- Trading happens over 24 hours – control; how and when you trade is up to you.
- Trading on leverage is allowed but it enlarges chances of gaining or losing.
- Focus can be placed on limited currencies rather than 5000 stocks.
- Anyone can join Forex– you can start with a small amount of money.
Some Risks of currency trading
- Economic factors like interest rates, employment, gross domestic product, and essentially customer sentiment cause long-term change in the exchange rate.
- The instability of the market makes a prediction of the market difficult and makes investors vulnerable.
- Avoid competing with day trading and minute interval based strategies.
- Following market trends can lead to better trade results. It is best to grasp knowledge on trend lines and technical analysis and use swing trading techniques which allow buying and selling to take place over a specific time frame.
- Speculation states that potential investors keep an eye out for recurring currencies that vary from high to low in the market.
How to know if Forex trading is for you
Sufficient knowledge of leverage, foreign exchange, volatility and market conditions of the country’s currency that you wish to trade are all essential for successful trade to ensue.
Prediction of how these factors affect the comparativeness of the currency is also necessary. To accurately guess the outcome of the market is difficult as varying factors such as politics, market confidence, amongst other unprecedented events play a role.
You will also need to:
- Have a full understanding of how Forex works.
- Properly research the market and closely watch your trades.
- Grasp the workings of online trade platforms and their uses.
- Have a financial adviser with whom to discuss trading risks.
- Invest only a fraction of what you have.
It isn’t always for everybody
The high level of risk involved in Forex trading makes it unsuitable for the faint-hearted. Factors such as your investment goals, experience level and risk interest should be taken into account before trading. The risky nature of the market means that there is a chance that you will lose all or a majority of your investment; hence it is better to invest what you can afford to part with. For clarification of any concerns you may have, getting the assistance of a financial advisor is recommended.