So, you’ve got some spare money that you want to invest and have decided to look into trading. Previously exclusive to traders and organizations, trading is now open to anyone willing to take a chance on a stock exchange. But which one? Many individuals opt for the Foreign Exchange, more commonly known as Forex. It’s the world’s most popular stock exchange and is always open, somewhere around the world. But how do you know which currencies are the best to invest in and when? Well, here’s 8 important tips to get you on your way.
1. Knowing Currency
Before you begin, you need to do a bit of background research and have a basic knowledge of trading. After all, it’s your money which you’ve worked for, so the last thing you want to do is throw it away, so here’s your first tip: know currency.
Currency is more than just money. It can be either fiat or crypto. Fiat currency is government issued money, legal tender, like dollars, euros and pounds sterling. Their central bank has considerable control over their country’s economy because they control the amount of money produced, and when, in line with market forces.
Contrastingly, cryptocurrency, which includes Bitcoin, Litecoin and Ethereum, are not government issued. This means they’re not controlled by a central bank. Cryptocurrency is decentralised as it’s not subject to the same control as fiat currency.
Whilst you can invest in both fiat and crypto currencies, you need to be aware that cryptocurrencies are not as stable as fiat currencies because they don’t have the support of their respective governments. However, both crypto and fiat currencies can be used to buy and sell goods and services. They’re also affected by economic factors like supply and demand.
2. Knowing how Forex Works
Forex is a spot market. This means trades and assets are immediately exchanged from the buyer to the seller. So, one currency will be exchanged for another at an agreed price, beforehand. This price is known as the spot price.
This type of trading, exclusively between a buyer and seller, is known as over-the-counter (OTC). The price can either be a spot price, which is already agreed, or it can be future based. OTC stock exchanges are usually spot trades and the world’s largest OTC market is Forex.
Forex is therefore a spot market that tends to deal with OTC trades between two currencies, known as currency pairs. Investors, traders or forex brokers will buy or sell according to which currency’s value will increase (long) or decrease (short) against the other. It’s these exchange rates that will determine whether each currency is bought or sold. Therefore, one currency is exchanged for another at its current market rate when a Forex trade occurs between buyer and seller.
Even though Forex is decentralized, like cryptocurrency, fiat currencies have the backing of their country’s central banks. This means their respective governments are responsible for the stability of their currency’s value, thus providing their currency with the security that cryptocurrency lacks.
3. Have a Budget
Be aware of your finances and do not over-invest, no matter how appealing currency exchange rates may seem. Remember: you still need to eat and have money for the unexpected. If you put all of your income into trading and unfortunately lose it, you’ll be either struggling or in debt from borrowing to survive. No one wants to live like that, so be responsible. Calculate how much you can feasibly place into your brokerage account and be sensible with how you trade.
4. Open and Fund a Brokerage Account
A brokerage account is different from a normal bank or saving’s account. A brokerage account is a specific account for trading that allows you to buy and sell various investments, like bonds and stocks.
It’s worthwhile doing some research to find an account that best suits your needs. If you’re thinking of getting a broker to trade on your behalf, perhaps ask them what accounts are available.
Once you have this account, deposit money into it. It’s this money that you’ll use to trade. With a brokerage account you can also hold any foreign currency purchased in it.
5. Have a Strategy
This is an important point. Don’t go blindly into trading on the Forex and expect to make a profit. You have to know what you’re doing because if you don’t you’ll more than likely lose your money.
How do you do this? Move onto the next tip to find out.
6. Research and Pay Attention to News
Research. Pay attention to news and current affairs on both the national and international stage. Watch how events affect different currencies. Observe how events unfold. Predict what’ll happen next. Of course, no one has foresight, so you won’t be right every time, but when you start predicting events based on what’s actually happening, that is the time to invest.
Economic changes will affect the stock exchange. One currency will often perform better than another. You will only know this from researching and developing your strategy as a result of your research.
If you go blindly in, then be prepared to part with your money for little to no return.
7. Place a Buy Order for a Currency Pair
Once you’ve done your research and watched the markets, you’ll have an idea about what currency pair you want to trade and how.
A currency pair is made up of two currencies, with one being quoted against the other. The first listed currency of the pair is known as the base currency, which is the currency you’ll sell. The second currency is called the quote currency and is the one you’ll receive in return.
8. Watch your Investment
Just because you’ve invested your money in currency pairs or have a broker doing it for you, it doesn’t mean you can sit back and do nothing. You still need to keep an eye on your investment and what’s happening to the economies of the currency pair and around the world. This is because you may want to pull out if something changes the exchange rate. You’ll only know this if you’re watching your investment.
Forex is a dynamic market and always subject to change due to market forces. Your investments can be affected because of this, which is why researching and paying attention to current global events are vital. If your investments are no longer making you money, you’ll need to opt for another currency pair. You’ll do this instinctively if you’re paying attention to what’s happening. These 8 tips will set you on your way to making a good start in trading, so always anticipate your next move and never be complacent.
