By Louis H-P on April 12, 2022Reading Time: 3 minutes
Investing in the Forex market means benefiting from its great volatility and liquidity. This makes it a highly attractive investment venture amongst retail Forex traders. It therefore, could be a beneficial addition to your portfolio.
Do you know what is Forex
How can you profit from currency pairs
How you can use CFDs to increase your returns
There are things to consider should you leap into the world of currencies and Forex trading, This involves research and ensuring you have a full understanding of what is involved.
This will put you in a better and wiser position as a Forex trader. This should increase your chances of potential profit when trading currency pairs.
Despite an extensive list of things to consider, here are our top three essential areas to focus on before investing in the Forex market.
The first step in becoming a successful Forex trader, is to know what is Forex. In particular how the market usually behaves and which factors impact the value of currency pairs.
In other words, you should have a full understanding of the Forex market in its entirety. You can then make well-informed trading decisions, and ultimately increase the potential to profit.
Having an understanding of the factors which can affect currencies is important. This includes political events and macroeconomic data like unemployment rates. An economic calendar will list these.
This tool collates all the current and pending economic events around the world. It also highlights their likely impact on the relevant currencies. You can use an economic calendar to identify and track major geopolitical events. These are events which could impact your position on the Forex market.
Forex trading, in simple terms, is the simultaneous purchase of one currency against another. These are therefore traded in what are known as currency pairs. Understanding how to read currency pairs is very important. You should endeavor to learn before you begin Forex trading.
Currency pairs include a base currency and a quote currency. If we take the example of the Euro (EUR) and US Dollar (USD), this would be presented as EUR/USD 1.09024, where you would buy in Euros and sell in Dollars. In this example, EUR is the base currency and USD is the quote currency. The exchange rate is reflected in the quote currency.
The number represents the exchange rate, so this would mean 1,000 Euros can be exchanged for 1,090.24 Dollars. If the EUR were to strengthen against the USD, then you would profit from your trade. Whereas, if it were to fall against the USD, you would incur a loss.
As well as fully understanding the Forex market, you should also have an in-depth knowledge of the currency pair you wish to invest in. It’s advised to conduct thorough research before entering a position on the Forex market. This includes the way in which the currency pair tends to behave, or any developments in respective countries, for example.
Forex trading most commonly takes place on the over-the-counter (OTC) market. It may be the case that you choose to do the same, when you begin Forex trading.
However, you could also consider other ways to trade Forex. Alternative means of trading currency pairs include futures and contracts for difference (CFDs). Forex CFDs are favoured amongst experienced traders. This involves the speculation of the movement of the underlying asset such as currencies.
Any profit or loss is calculated based on the price movement of the underlying currency pair. In particular the difference between the opening and closing prices. This is rather than owning the asset.
With CFD trading, you can also trade with leverage. This increases your exposure to the Forex market, with a relatively small amount of initial capital. With an increased trade size, leverage trading can magnify your potential losses. It can also magnify your potential profits!
As with any investment, Forex trading does come with its risk. It is therefore always best to research thoroughly before you begin trading. You could also try a free demo account. May online trading platforms offer this, so you can get to grips with the market. You can then try out any strategies before moving onto real capital.