4 Tips For Trading Currency
Alternative investments are trendy these days, as many are attracted to the idea of long-term financial strategizing without the everyday turmoil of the stock market. For some, a suitable alternative might be buying up gold or some other precious commodity. For others, it might mean seeking equity in a developing company. But one of the most popular modes of alternative investment around the world is the currency trade.
Often referred to as forex trading, it’s pretty simple to understand. It’s basically the buying of one world currency with another in an attempt to benefit from their shifting values against one another. For instance, if you buy euros with dollars and then the value of those euros (in dollars) increases, you’ll be able to sell the same euros back for more dollars than you began with. That’s a very stripped-down explanation, but it communicates the basic idea. Really, it’s a lot like stock investment, only far less complicated.
If it’s something that sounds interesting to you or that you’ve already considered, here are a few specific tips and considerations to think about before getting involved with forex trading.
Prepare For Simplicity
The point of this tip is not to suggest that forex trading is easy, or specifically that making money with this sort of trade is. However, the actual methods by which you’ll make trades are in many ways simpler than those connected to conventional stock trading. Read through the benefits of forex trading and you’ll find mentions of low costs (there are hardly any fees for making trades), non-stop trading (forex markets are open 24/7) and high liquidity (which facilitates quick conversion of assets to cash). These are all among the most appealing aspects of the market, and together make for an environment that some find refreshing compared to stock exchanges.
But Consider The Specifics
Forex trading sounds (and in many ways is) simple to go about. However, keep in mind that it’s not always as simple as trading one currency for another, because you don’t usually have currencies other than your own to give out, at least at first. It’s not as if you can scroll to part of your account and see your money in euro form there simply because you want to sell some euros! One analysis of common forex trading questions touched on this topic and explained that it comes down to options. That means you can more or less buy a stake in one currency’s relationship to another, effectively betting on that currency rather than actually buying it and selling it if and when its relative value inflates.
Learn The Influential Factors
When investing in stocks, there are a lot of factors at play. Overall market movement and major financial or geopolitical events can influence the entire market. But where each individual stock is concerned, you can analyze that stock’s patterns, the company’s performance and projection, and the related industry’s recent strengths or weaknesses. In forex, these factors don’t really exist in the same way, which means you’ll need to get used to a whole different range of influences. Countless events and developments around the world can alter how countries’ economies perform and thus how their currencies perform against one another. But typically you’ll want to keep an eye on things like relevant countries’ inflation and interest rates, and general shifts in economic outlook or political stability.
Let Go Of Diversification (To Some Extent)
Diversification is considered mandatory in most investment portfolios. Indeed, one look at the significance of diversification called it the single most important rule to follow, according to financial experts. This is all perfectly fair and accurate, though in forex you may have to change how you view diversification. In a stock portfolio, you may hold dozens of stocks at a time. In forex trading, however, only a very small number of currency pairs—fewer than 10, in fact—dominate the whole market. Diversification can still be a valuable strategy, but you’ll need to begin considering it relative to a far smaller range of possible investments.
If this all sounds reasonable and doable, you may want to consider forex trading as your alternative to traditional financial ventures. For some it’s a perfect option, though it still carries the risk of any type of investment.