Lets face it; there are thousands of ways that you can make your money grow for you. For example, you could build a portfolio of rental properties for an almost passive income. You might even lend your money to others through a peer-to-peer lending platform. Or you could invest in money itself!
The latter option might sound a bit daunting. After all; where would you store a room full of cash? And what happens if someone tries to steal it from you? The good news is that Im not about to suggest you go out and buy a lot of hard currency from your local exchange. Instead, you may wish to consider investing your money in the foreign exchange market.
In a nutshell, you are buying and selling currency in a similar way to the example above. Except, in this case, you dont need to store any physical currency. Nor do you need to buy it and keep it locked away in a bank account somewhere in Switzerland! What you can do is make a profit by determining whether the value of a currency pair will go up or down!
Why does it make sense to invest in currency?
As you already know, there are scores of different currencies used throughout the world. In the world of forex (foreign exchange), the buying and selling of currency are mostly done in pairs. That is, you sell one currency to buy another. There are plenty of profitable currency pairs that you can trade, such as:
- EUR/USD (Euro – US Dollar);
- USD/JPY (US Dollar – Japanese Yen);
- AUD/USD (Australian Dollar – US Dollar).
Right now, you may be wondering why it is right to invest in currency. The first reason is down to availability. You may think that investing in company shares is a wise move, but even the biggest companies can attain huge losses or even go bankrupt at a moments notice. With a strong currency pair, there are no companies that will cease to exist.
The second reason is down to predictability. Sure, you might think that Apples shares will go up ahead of a new iPhone release. But, what if its a big letdown and the share values tumble down? Believe it or not, its easier to predict the market sentiment with currency pairs. Thats because forex often moves according to economic events and major news.
Theres also a lot of pattern matching that you can do with currency pair trading, and youll know the best times to buy and sell money. That often isnt the case with company share investments.
Last, but not least, you can make instant profits from short-term price movements. If you buy and sell company shares, you often need to wait months before a significant price action movement takes place.
Isnt forex currency trading the same as gambling?
Critics of forex trading will often tell you that its nothing different to say betting on a horse to win a race. What they dont realize is that forex trading offers you the chance to make calculated decisions. With traditional sports betting, its much more complicated to make an informed decision.
Of course, if you think that forex trading is the same as gambling, you could technically apply that to any form of investment. Thats because when you invest in something, you speculate that its value will go up. With forex, you can determine whether the price of a currency pair goes up OR down.
Forex currency trading isnt anything new. In fact, youll find that virtually all major banks and investment firms do this as part of their strategy to increase profits! Both individuals and companies have invested in currency for many decades, and today its now possible to invest money using online trading platforms like IG.com.
Is it legal to trade currencies?
In a word, yes. Of course, some countries may have restrictions on the type of financial products you can trade due to political or religious reasons. But, in general, there is usually no legal issue with buying and selling currencies.
How likely is it that you can make a profit from trading currencies?
With any investment, there is the potential to make or lose money. If you have a solid trading plan and strategy, the profits you make will be much higher than any losses you incur. The trouble that some newbie forex traders have is they arent using the right strategy for their needs.
As a result, they experience high losses and are often quick to demonize the industry. Contrary to what you may think, forex is a decentralized network of exchanges. One person or company alone cannot change the value of a currency pair illegally!
If you trade currencies as part of a wider investment portfolio, and you have a good trading strategy, you can expect to make high profits depending on the amounts invested.
Theres an article by Michael Banks that you should consider reading about diversifying your investments. It offers good food for thought for any investor, whether they are new or experienced. Forex shouldnt be the sole way to invest your money!
How complicated is it to trade currency pairs?
To make the concept more appealing to retail traders (i.e. individual consumers), there is a range of ways to trade forex online:
- Forex – the original way to trade the financial currency market. You buy and sell both currency pairs with another trader, referred to as a spot transaction;
- Spread Betting – the same as forex, but you dont literally buy and sell currency. Instead, you speculate on whether the value of a currency pair will go up or down;
- Binary Options – works on the same principle as spread betting. The major difference is you have to decide a time period of when the price will go up or down. You also know the risk and reward before you trade.
By now, you are perhaps wondering which is the best style of forex trading for you? Should you stick with the conventional forex route, spread betting, or binary options?
The advantage of regular forex trading is you can offset any losses to lower your tax bills. It makes sense if you wish to set up a company offering investment services – even if youre only doing it for yourself.
However, spread betting and binary options aren’t usually subject to tax as you arent buying or selling anything as such. Instead, you are merely speculating on a result. The majority of individual retail traders choose one or both of the latter two options for that reason.
With forex and spread betting, there is usually no fixed expiry time for your transaction. You are free to keep a position open for as long as you wish, even if thats over a period of months! But, with binary options, you must select an expiry time from 60 seconds to the end of the day.
How to get started with forex trading
Before you decide that you want to make your millions on the foreign exchange market, its important to remember one thing: you WILL lose some money. Even the top city traders working for investment firms dont have a 100% success rate. Thats because the financial markets get driven by outside events such as political instability or economic news.
With that warning in mind, if youre happy to take the risk, starting your trading career isnt as hard as you might think. Often, making an informed trading decision is about doing prior research. For example, if the price of a currency pair is going up, youll need to know when it may hit a ceiling level and bounce back down.
Fortunately, you can use technical indicators to assist you with such analysis. For instance, using a forex currency pair chart, you can draw support and resistance levels. There are two ways of doing this: manually using line drawing tools in the charting software, or programmatically with a software-based indicator.
When you decide to trade currencies on the forex market, you need to find a broker that offers this service. They will supply you with the tools (web-based or PC/Mac software) to display charts in your favorite currency pairs. To start trading, you need to deposit some money with your broker so that you can open a position.
As youre new to forex trading, the good news is that you can learn to trade using a demo account. You have a virtual balance of say $10,000 that you can use to open positions with. Of course, if you make a profit, you cannot withdraw the money for obvious reasons!
There are many strategies that you can follow to create a successful forex trading plan. Its recommended that you demo a few of them out (you can find plenty of them available online for free). That way, you can find a strategy that suits your needs and trading style.
Once youre ready, you can deposit physical money into your trading account. The forex currency markets are available from Monday to Friday, 24 hours a day. That gives you the flexibility to choose when you trade. Good luck!