Investment in forex doesn’t mean easy and quick money

On January 4, 2013 | By | In Forex tips

Forex has become a widely popular means of investing in the financial world. I remember, even seven years ago, a word “forex” would mean nothing to a common man and after explanation (foreign exchange currency market) people would still ask questions like these: “so, you are in the stock market?” Well, no… Forex is not a stock market, but the principals applied are mostly the same.

Principals of investing in forex

Similar to the stock market

If you bought Apple stocks and after a good news release the stock price would climb up, you would most probably sell it at the highest point. The difference between the price that you bought and sold would be your profit. The opposite is when you suffer some money loss, after buying some stocks that went down in price after a few days or months. If you bought one stock for four dollars and after one month it was worth only three dollars, you could have two choices…

1. Run out of the market and sell it at any price, so your accumulating loss will be stopped and you will only have 25% drawdown to recoup.

2. Keep waiting and hoping the price will go up again.

This second choice has one looming threat – you could loose even more money, because you do not know how long the price is going to fall and most importantly, how deep is the fall. The stock unit could go down to half the price that you bought and you will be loosing already 50% of your money invested.

Instead of stocks you trade currencies

Forex investment principals are almost the same, only you are able to trade currency pairs – one nation‘s currency against the other nation‘s currency and you can do that 24 hours per day, 5 days a week using forex software programs. Let’s take for example EUR/USD currency pair which has the 1.3104 price at the moment. This particular price means that 1 euro is worth 1.3104 dollar. If I expect the EUR currency to rise in price against the USD, I will buy, let’s say, 500 euros for 655 dollars (500 times 1.31 equals 655). If the dollar gets cheaper in relation to EUR (EUR gets more expensive) and the price reaches 1.3200, I could sell my 500 euros for 660 dollars (500 times 1.3200 equals 660) and keep the price difference or the profit of 5 bucks.

What defines the value of one currency against another?

The value of one currency against another is defined by fundamental and technical factors.

Fundamental factors basically mean economical and political news of a country the currency belongs to. For example, if the country’s Gross Domestic Product (GDP) is increasing and joblessness rate is falling – the economy is on the rise and the currency of such country is getting stronger against other currencies. Political factors are also of huge importance – oncoming election or social instability may weaken the currency.

Technical factors are all about the history of price movement which is used to predict the future price direction. It may involve important currency price levels in relation to other currencies as well as investors’ and speculators’ trading volume and price volatility. Technical indicators, such as pivot points, currency movement trend lines and price action patterns can also influence the direction of a forex pair movement in the charts.   Currency price may rise just because it’s treated as undervalued and the investors expect it to rise to some extent and vice versa.

What makes forex trading so attractive?

There are a few things that make investment in forex trading even more attractive.

The first is leverage, which enables you to trade with much more money than you really have. For example, if you invest 1000 dollars, you may trade with as much as 100.000, because the remaining 99.000 is provided by your broker. In other words you are borrowing a large part of your trade’s value from your broker. Trading with large sums means that even the smallest currency price change may bring you large profit or loss. Managing your funds while trading with big leverage is of vital importance.

Small trading fee
There is also a small trading fee, compared to a stock market. To begin trading with currency pairs you only have to pay a part of the currencies’ spread (the difference between the quoted prices when buying or selling currencies) to your broker and that is just a fraction of what you could earn or loose.

Profit from bull or bear market
Finally there is one more thing, which excels forex trading against other kinds of investing ventures, and that is profit in both rising and falling markets. Let’s take an example:
EUR/USD is falling, which means EUR is depreciating against the USD currency and if you buy USD and sell EUR – you’re in profit. If you take the opposite currency pair movement – EUR/USD is rising – buying the EUR currency against the USD could also mean profit. I suppose, there is no need to mention, that you only have to choose the right currency, otherwise it will be just your money loss.

Forex trading accounts

Standard account
The most popular forex account leverage ratio is 1 to 100, meaning that with 1000 invested dollars you can trade with sums up to 100.000 dollars borrowed from your forex broker.
Operating with 100000 units is mainly done in the so called standard forex account; you could even choose to trade with more forex funds – 500000 or even 1000000 currency units. One drawback of the standard account is your limitations – you only trade with currency lots starting from 100000 units or more and you cannot choose to trade with less money. Your smallest invested sum must be from 1000 or even 2500 dollars, depending on the broker. The smallest fluctuation while trading just one standard size lot could mean huge profits or losses. There are many forex brokers and liquidity providers offering demo and real trading, like Oanda, Admiral Markets, AAA Fx, Hot Forex and so on and so forth.

Forex mini account
However, for those wishing to invest less there is a smaller investment account – mini lot trading account (mini account), which lets you buy mini lots of just 10000 units – respectively you will invest less money and the currency market change would bring less profit or loss.

Forex micro account
Even if you cannot invest more than 100 dollars, there are forex brokers offering to open micro accounts. For example you can invest just 1 dollar using the famous Oanda broker – I believe that’s affordable to everyone.

Managed forex trading account
If you don’t have much time to do all the forex market analysis, placing orders etc., you could as well invest your funds into a managed forex trading account. In this case your assets will be managed by a professional forex trader, except that you will have to share your profits with him.

The points that I have touched upon are the very basics of forex investment. If you want to learn more, please read more articles about trading in demonstration and real accounts, forex indicators, trading tips and the like.

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