Understanding the Forex Market: How to Make Better Investments

words Alexa Wang

Forex Market

Most of you have probably heard about the Forex market, but does that mean that you’re familiar with this term and know exactly what it represents? Some of you maybe know, however, there are a lot of people who do not have the slightest idea what it really is.

Before we give you more information regarding investments, let’s first get some basics about this market. Forex market is actually over-the-counter (short for OTC), a global market where banks, various corporations, traders and investors sell and purchase world currencies. 

All these things are being done through the interbank market, which is an online channel through which all currencies are traded five days a week. Now, the Forex market is one of the biggest financial markets, that has a daily turnover of over 5 trillion US dollars.

Long story short, to some this is a mechanism for changing one currency into another and it is a market that works between people that are represented by brokers, also between banks and between banks and brokers. If you understood everything, and you’re eager to be part of this market, here’s how you can do it!

What Are The Strategies?

Classic Forex Trading Account

This could be your first step. All you have to do is to create an account with a Forex broker and you can start trading any currencies from all around the world. Namely, in comparison to the U.S. stock exchanges, there are numerous differences in how this particular market works. 

  • Currency dealers rarely charge commissions. They usually get money on the bid-ask spread.
  • Currencies are traded in pairs. You have to assume that one of them will go down (short) while the other one will go up (long)
  • There is no upper limit when it comes to the size of your position
  • No central clearinghouse and no regulated currency exchange for trades
  • There is no uptick rule for making short positions

Have A Forex Strategy

No matter what you do, it’s important to have a certain strategy to succeed. The same goes for this one. You should be very careful. Most people rely on their gut feeling when buying currencies, but that’s not a very smart tactic.

Don’t just purchase yuan, loonies, pounds or anything else just because something “told you” to do it. Do your homework and simply research the economic outlook and then make a decision regarding any purchase.

Moving On To…

Having A Demo Account

Investing in the Forex market is not as easy as it may seem. Yes, you can get the best forex signals that can help you evaluate every pair and place but it still takes some time to get yourself familiar with this. So what can you do then?

You can start by creating a demo account. With its help, you can learn some important things. Now, even if you think that you are starting to lose equity, you can always return to this account. Perceive this as a form of practice.

It will help you understand the process of trading much better until you are ready to take control of the workings, as well as the complexities of this entire process. More importantly, a demo account is going to help you determine your style of trading. 

Foreign Bond Funds

There are mutual funds that invest in foreign government bonds, which earn interest denominated in foreign currency. This means that if the foreign currency is high when it comes to value relative to your local currency, then the earned interest rises when converted back to local currency. 

We will list you some examples of such funds, for instance, Aberdeen Global Income Fund, the Merk Hard Currency, and Templeton Global Bond Fund 

Keep An Eye On Your Investments

Having an investment is a serious thing to do, that’s why you shouldn’t take this step lightly. Always keep in mind that these markets change very quickly and that usually happens when we are not paying enough attention.

Moreover, they change even quicker than stocks. Therefore, it’s a must to always be focused on your investments and be prepared to act in case something goes wrong, meaning they take a turn in the wrong direction.

Forex Market tips

Mistakes Are Normal

Trading mistakes are quite common, especially at the beginning due to the lack of trading experience. Once this occurs, try to remember that it is completely normal and do not be too hard on yourself.

Instead, do something useful, such as, write down all your mistakes and what caused the negative outcome. After you did that, match them up with the process that you have taken and design a model that would define how a bad and solid trade is supposed to look like.

Why is this important? This model that you have created will serve as an example and it will help you make good steps during your next trade and at the same time, get the most out of your profits. 

ETFs 

If you are inexperienced, or you simply lack some confidence when it comes to trading on the Forex market, you can always turn to currency exchange-traded funds or ETFs. Now, not everyone uses these funds and according to some trading experts, they can often be riskier than bond ETFs and stock.

Namely, you can find currency ETFs that track certain currencies against other currency or against more currencies. One of the best examples is that the CurrencyShares Euro Trust goes higher whenever the euro is doing fine. On the other hand, it can get a boost as well when the US dollar doesn’t do well.

Multinational Companies

Some people tend to indirectly participate in the foreign currency markets via their ownership in corporations that are doing pretty good in other countries. The most popular firms from the United States that are working overseas are Coca-Cola, McDonald’s, Pepsi, IBM, Walmart, and many others.

Generally speaking, the profits that are coming from overseas operations are boosted if the foreign currency appreciates versus the dollar. Why is that? It’s because that income is converted back into dollars for financial reporting purposes.

Is It Worth A Try?

We would be wrong if we claimed that the Forex market isn’t an inviting and tempting place, but definitely intended for someone who is experienced and simply knows what he or she is doing. It can be risky, especially if you’re planning to invest a lot of money, so we advise you to be careful and thoroughly analyze these strategies.

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