Investing can open the door to a bright financial future. But there are so many investment options out there, and the number of overly risky investments far outnumbers the “safer” ones.
The FOREX market is one of those risky investments that you need to be aware of – mainly so that you can avoid investing in it and avoid serious financial losses.
What is the FOREX market?
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foreign exchange market or FOREX marketinvolves the exchange of foreign currency.
You may already have some experience with currency exchange if you have traveled abroad. In this case, you probably know that the value of your currency has different values in different places. For example, you may find that in a place like Thailand, your US dollar will be more than in an expensive country like Switzerland.
It’s safe to think of the FOREX market as a much larger version of the exchange of funds for vacations abroad. But instead of trading currencies to buy tour tickets, the goal is to speculate on the future price movement of a particular currency.
As a large, global and generally liquid financial market, FOREX sees constant price fluctuations based on countless factors from around the world. And because the FOREX market clock is almost constantly running with various financial institutions around the world, these price fluctuations rarely stop.
But FOREX investors are hoping to find in this volatility a profitable opportunity to speculate on the future prices of the currency.
3 FOREX trading methods
The FOREX market is a big place. Each investor is trying to buy a currency that he thinks will rise in value and sell a currency that may lose purchasing power. But the approach of investors to this will be different.
spot market
The spot market is the most popular foreign exchange market. Investors enter into transactions here in real time based on constantly changing exchange rates. As prices fluctuate, investors buy and sell currencies to take advantage of the opportunities they see.
forward market
The forward market involves private transactions between traders who enter into binding FOREX contracts with other traders that specify the exchange rate for a certain amount of currency at a certain date in the future.
futures market
Last but not least is the futures market, which is very similar to the forward market. An investor can buy or sell a predetermined amount of currency at a set date in the future. However, these deals are made on public exchanges, not with private investors.
FOREX terms you need to know
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Now that you have a better understanding of what the FOREX market is, it’s time to learn the terms you’ll come across while navigating the forex market.
currency pair
When you make a trade in FOREX, a currency pair is required. Sometimes a currency pair is called a FOREX pair. Essentially, a currency pair highlights the value of two currencies quoted against each other.
The first currency specified is called the base currency, and the second in the pair is called the quote currency. As an investor, you would trade in the base currency with enough quote currency.
There are several major currency pairs that investors commonly trade in, including EUR/USD, USD/JPY, GBP/USD, and USD/CAD. But there are also a few minor pairs known as exotic pairs or exotic currencies. As a rule, exotic currencies are pairs that include an emerging market. In addition, the US dollar will not be involved in the minor pair.
Spread between supply and demand
The rate is the amount that the buyer is willing to pay for the currency. Ask is the minimum amount that the seller will accept for currency. The spread between the buy and sell price is the difference between the two amounts.
Many
A lot is a standardized unit of currency that traders buy and sell. For example, a popular lot size is 100,000 currency units.
Use
Many traders cannot afford to buy the whole lot at once, so they use leverage to make trades. This means they are borrowing money to facilitate the transaction. Most leveraged traders buy on margin, which means the investor will have to pay interest on the money they borrow.
Pip
Pip means percentage in points. The number indicates the absolute minimum price change possible in a currency pair. In most cases, FOREX pip is 0.0001.
What are the risks of FOREX trading?
Like all types of investment, trading in the foreign exchange market involves risks. But the risks associated with this type of investment opportunity are perhaps more pronounced than more common forms of investment.
The increased level of risk starts with many investors having to rely on leverage to make trades. This leverage can lead to big windfall profits if everything goes as expected. But if the trade doesn’t turn out the way you hoped, you may be forced to sell at a loss.
Unfortunately, there is a high risk of losing money as an individual investor in the foreign exchange markets. In addition to the risk of loss, you will find that transaction costs can quickly eat into your trading profits. Constant price fluctuations and countless variables make this strategy unpopular with average investors.
More: How to determine your investment risk tolerance
What factors affect prices?
FOREX may not be suitable for your investment portfolio. However, the foreign exchange market can still have a big impact on your daily life. This is because the currency markets can influence prices all over the world.
As in all markets, price changes in this market are based on supply and demand. But the demand for any particular currency can vary depending on economic policies, interest rates or the political environment in the country.
The value of your currency may fluctuate depending on trends in the FOREX market. As an average consumer considering a large purchase of an imported good, it can pay off to wait for the right moment when your currency appreciates in value against the company that makes the good. Another reason to keep an eye on FOREX market trends is if you are planning a trip abroad. Keep an eye on the value of your currency compared to the value of the currency used in the country you are visiting.
For example, let’s say you’re an American who wants to travel to Europe. It may make sense to postpone your trip until you find a favorable exchange rate that allows you to buy more with US dollars abroad.
Who should trade FOREX?
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FOREX can be an excellent opportunity for investors with sufficient cash reserves and high risk tolerance. Also, you should have time to dedicate yourself to this skill set as you learn about trading strategies, technical analysis, and technical indicators that influence market fluctuations.
You must be prepared to lose some of your investment as you learn the ropes of this risky strategy. But you can make investments in FOREX profitable for yourself.
Keep in mind, however, that if you don’t have the time or money to invest, FOREX may not be right for you. As a general rule, the average investor will most likely not enjoy the process of FOREX trading.
The good news is that there is many other ways to invest out there! You just need to find the right one for you.
More: 7 ways to start investing with little money
Summary
Investing in FOREX involves buying and selling currencies in order to benefit from the exchange rate. Since it is the largest market in the world, you can find many investment opportunities. However, there are financial risks that you should take into account before jumping in.