Working hard for your wage day after day, week after week, is often not enough to grow true and lasting wealth, and instead you will need to put your money to work as well. There are a number of ways you can invest your money so that it works harder for you and one of those options is to trade on the Forex market.
The Forex market is where you can buy or sell currencies and placing a trade on the market is very similar to other forms of trading, such as on the stock market. As a result, if you have any prior trading experience you should be able to master the Forex market quite quickly, and even if you’ve never traded before, you simply need to learn how to exchange one currency for another, with the expectation that the price will change, making the currency you’ve bought increase in value when compared to the one you’ve sold.
There are a number of strategies to trading the Forex market, and of course there are risks involved, so use the following advice to achieve success in your investments.
Trend Trading on the Forex Market
The trend trading strategy is also known as trend following, and is seen as a safe way to invest in money markets such as the Forex market. Trend following indicators can be used in conjunction with a trader’s technical analysis charting equipment, however, a popular tool which is not a technical indicator is the trend line.
While the trend line is simple, it can be an accurate and useful tool to offer readings which predict the continuation and reversal potential of a certain trend in the market. A trend line to help with your Forex trading strategy can easily be constructed using the following steps:
- Identify a trend. You have to be able to see a trend, whether it is an upward trend or a downward trend, it needs to be one which shows up clearly on your chart. An upward trend on your chart will be indicated by a series of more highs than lows, where a downward trend is identified by a series of lows. If your price chart doesn’t show these upward or downward movements then it is a non-trending market.
- Line up an uptrend. If you are looking at an uptrend, you will see prices rise, and the drop back after a rise. Over a certain period of time you will see two significant low points, and you can draw a line connecting these two points.
- Trend line validity. A trend line will remain valid for as long as there is no significant drop below the trend line. Therefore, as long as the price trades above your trend line, you can continue to excel in the market.
The Potential of Forex Investments
When you make informed and timely decisions in any investment market you have the potential to make a profit. In the case of the Forex market, you can take a cross currency pair and exchange their own currency for a foreign currency in the hopes that their domestic currency will depreciate, and when they convert it back to their own money, they will have made a profit.
The Forex market also gives international goods and services importers and exporters access to an international market for trading opportunities. Individual and retail traders on the other hand will continue to hold currencies which appreciate, and reduce their holdings of other currencies in order to make a profit. At the same time, there are a number of modern financial products which can help investors make money in a falling market too.
To take advantage of both rising and falling markets investors use products known as contracts which are available to trade through a broker. Through the broker you can buy or sell contracts for a profit, without physically having to buy or sell the contracts, but instead you are executing an order to process. The position to take advantage of an appreciating currency is a buy order, where a sell order can help you profit from a depreciating currency.
The movements and profits of Forex investments are measured in pip movements, which measures the movement of the fourth decimal place of a currency. For example if a currency price moves from 0.84693 to 0.84683 there was a one pip movement. A pip is used as a reference point to measure how much a trader can potentially make, based on the volume of their trades. For example, when a trader purchases a full contract, the value of the potential return and risk is $10 profit or loss for the second named currency, per pip movement.
Common Forex Investment Strategies
Before you start investing in the Forex market it is important you have a strategy you are comfortable with, and one you know works. While there is no such thing as a no risk investment, it is possible to practise your Forex investment strategies with real trades and real currencies, before you invest your own money for real.
To get started as a Forex investor, use the following four strategies:
- Open a demo account and choose brokers to watch. When you use a demo account you don’t risk losing any money, and you can start making investment based on the movements of your chosen fast broker and slow broker. Where the fast broker is quick to take advantage of changes in the market so you can see the future of things, while a slow broker takes their time in responding to give you time to make a decision about what you want to do.
- Be confident. Use your demo account for as long as you need to until you become confident in your trades, your abilities and your resources. When you are confident enough to venture out of the demo account, you can start taking home your profits for real.
- Broker bonuses. Take advantage of any bonuses offered by the brokers. In some cases this could be a 30% bonus on top of your investment deposit. also take advantage of leverages from brokers as many offer 1:400 which means that you can trade with amounts 400 times more than your deposit amount.
- Keep your successes under the radar. As soon as you earn more than $500 in your Forex account, change to a different broker on that day as this will ensure you the maximum payout amount and won’t alert the slow brokers to your success.
Leverage is an important investment strategy you should consider using in the Forex market, where the default leverage in most accounts is 1:100. This means that for every $1 you have in your account, you have the buying power of $100, and if you have $1,000 in your account you have a buying power of $100,000.
This can be useful a full contract is $100,000 of the base currency, but you don’t need $100,000 in your account to start trading when you have leverage. For example, if you wanted to trade a full contract and your account had leverage of 1:500 then you only need $200 in your account to invest. With a high leverage you can take up larger positions with only a small capital in your account. However, just remember that as you work with larger amounts you will see larger dollar movements per pip, which can quickly wipe out a small capital investment.
The Risks of Forex Trading
When you invest in the Forex market you can be affected by the foreign exchange risk, where companies will make a sale for an agreed price, but due to fluctuating international currency rates, the value of the sale is significantly less on the day of the sale, than was originally agreed to.
To protect your invested capital from a trade which goes against you, stop losses are usually in place. A stop loss is a present target where your trade will close out and properly using stop losses can minimise the risks of Forex investments. A stop loss also means you don’t have to continually monitor your investments, as the stop loss, stops you from losing all of your funds if something goes bad. You simply set the amount you are willing to lose in each trade, where risk levels are usually set between 1% and 5% of the total balance of your trading account. For example, if you set a risk level of 5%, you can place 20 trades which lose before you deplete all of your funds, or if you have an account with a $1,000 balance and you set a 2% risk per trade, a stop loss will stop trading for you if a single trade loses you $20.
It is just as important to manage your risk as it is to do your research of currency markets when investing in the Forex market. When trading the Forex market you will also need to manage another risk, that is the risk of your own emotions. The unique mixture of fear and greed an investor feels can become risky when these emotions start to dictate trading decisions. All traders are guilty of holding onto a losing trade for too long in the hopes it would turn positive, while if you pull out of a trade too early in the fear of losing too much, you can end up losing potential profits.
Instead, manage all of the market and emotion risks of Forex trading by using a complete trading plan, incorporating money and risk management as well as entry and exit rules. In this way you will remain in control of your emotions, and your finances.
