How To Invest In Foreign Currency

Investing In Forex Explained

The Forex market is now easier to trade compared to what it used to be in the past before there were so many forex brokers to choose from. In the past, the foreign exchange market was traded mainly by banks and organizations. Currently, anybody with an internet connection, trading platform and brokerage account can trade forex online.

The establishment of different forex brokerages has given single individuals opportunity to open a trading account and trade forex anytime and anywhere without any form of restriction.

Whilst there are advantages to be had by investing in foreign currencies, there are also risks involved. If you want to trade forex successfully, you will need to practice your trading skills and increase your trading knowledge. Most forex brokers offer demo trading accounts which you can practice your trading strategies on.

In this article, we will be taking a look at some of the key factors to consider before commencing with trading forex online.

Investing in Foreign Currency

Forex trading involves many benefits and risks. If you want to trade forex, it is essential you learn the risk involved in forex trading which makes it different from other markets such as the standard equity market and bond markets.

The availability of higher leverage in the forex market allows traders to increase the size of their trading positions. Whilst this can increase potential profits, it also increases the risk. The forex market is well known to be a volatile market to invest in. To help you to start trading forex more successfully, we have discussed about the risks and the benefits below.

Benefits of investing in the forex market

Forex market liquidity

The forex market is the largest in terms of volume and the most liquid market in the world. The average daily trading volume in the forex market is worth trillions of dollars. Investors in the forex market therefore have ample opportunities when speculating on the fluctuating prices of currency pairs. However, to be able to buy and sell forex currencies successfully, you must know how to trade forex and make informed trading decisions.

Portfolio diversification

The foreign exchange market provides investors opportunity to diversify their investments if they would usually only trade stocks, shares, commodities, cryptocurrencies, etc. There is a wide selection of major, minor and exotic currency pairs available to trade. This allows investors to spread risk across different currencies.

24-hour trading

The forex market is traded around the clock. This means that you can trade anytime of the day or night depending on your schedule.

Forex market is free to trade

With the availability of various forex brokers and trading platforms, you can now trade forex successfully from the comfort of your own home or anywhere that is convenient for you using mobile trading apps.

Risks of investing in the forex market

Just as investing in foreign currency has its benefits, it is as well associated with a number of risks. Some of the widespread risks involved in trading foreign currency our outlined below.

The currency market involves high leverage

The foreign exchange market shifts bit by bit and in small amount at a time. Because of this, high leverage through margin is provided by most brokers to traders. Whilst increased position sizes can mean greater profit potential, it also means an increase in trading risk for forex traders.

The foreign exchange market is highly volatile

Trading in the foreign exchange market is very volatile. It is never stable as a result of various economic conditions and fiscal policies governing and affecting the use of specific currencies which includes financial reports, interventions by the central bank of the different currencies traded and many other factors. What this means is that the value of a particular currency can flop drop significantly as a result of these factors.

Forex traders ought to be able to cautiously consider implementation of various risk management procedures to ensure they reduce their overall risks.

Major forex currencies to invest in

  1. U.S. Dollar (USD)
    Central Bank: Federal Reserve (Fed)

The US dollar is also known as the greenback. It is the currency of the United States which is the largest economy on the globe. Irrespective of this, the U.S. dollar is as well broadly swayed by the central bank and any notices related to the interest rate. The greenback is a benchmark for trading against major world currencies particularly the European Union euro, Japanese yen and British pound.

  1. European Euro (EUR)
    Central Bank: European Central Bank (ECB)

The European Central Bank is headquartered in Frankfurt, Germany. It is the central bank of the seventeen member countries that make up the eurozone.

  1. Japanese Yen (JPY)
    Central Bank: Bank of Japan (BoJ)

The Japanese yen (JPY) is regularly being traded under the carry trade section. It provides a low interest rate and thus is bumpy against higher-yielding currencies, particularly the New Zealand and Australian dollars and the British pound. Due to this, trading the currency is normally very unpredictable, and traders frequently take technical decisions on a more extended period.

  1. British Pound (GBP)
    Central Bank: Bank of England (BoE)

The British pound is slightly more volatile than the euro. The British pound (GBP) is as well referred to occasionally as the “pound sterling” or “cable”. You can trade on a more extensive range of this currency in a day.

Given the sways that can vary from 100-150 pips, the pound sterling can narrow as low as 20 pips.

  1. Swiss Franc (CHF)
    Central Bank: Swiss National Bank (SNB)

The Swiss Franc operates different from the rest of central Banks. It acts as a Central body that has private and public rights of ownership. The Euro and Swiss Franc currency pairs can have some similar behaviors.

  1. Canadian Dollar (CAD)
    Central Bank: Bank of Canada (BoC)

The Canadian Dollar is the seventh-most traded currency on the Forex market, as many institutions and individuals trade the CAD. A number of currency prices and commodities shift at the same time. A singular and distinct feature of the Canadian dollar is that it is related with crude oil.

  1. Australian/New Zealand Dollar(AUD/NZD)
    Central Bank: Reserve Bank of Australia / Reserve Bank of New Zealand (RBA/RBNZ)

This is one of the currency pairs frequently traded by individuals who engage in carry trading.

  1. South African Rand(ZAR)
    Central Bank: South African Reserve Bank (SARB)

The South African Rand is comparatively volatile and is often considered as a currency pair for trading against the Greenback particularly when you are engaging in carry trading. Another significant factor about the currency is that traders can consider its relationship with gold and platinum.

How to invest in Foreign Currency

As previously mentioned, the forex market (FX) is the largest market in the world. Roughly more than four trillion dollars are traded every day in the forex market. The forex market is traded by banks, money-making companies, central banks, investment companies, hedge funds and retail investors alike. You can buy, sell, exchange and make speculations on currencies in the forex market.

Forex investors can directly buy and sell specific currencies on margin via forex brokerages. Through this method you can invest a preliminary deposit that starts from a few hundred dollars to buy currency pairs with margin ranges of 1:1 all the way up to 1:500 and sometimes more. This increase in leverage can increase both potential profits and losses.

To also trade forex online you will need to open a forex trading account with a broker. I would always make sure that I am using a regulated forex broker that has an established reputation within the online trading industry. I tend to find that ECN forex brokers have some of the most favorable trading conditions. If you are looking for a forex broker then you may want to find some inspiration from my best forex brokers list.

There are different ways you can invest in foreign currency apart from the foreign exchange market and through forex trading. These include the following:

  • Foreign currency futures
  • Foreign currency options
  • Exchange-traded funds (ETFs) and exchange-traded notes (ETNs)
  • Certificates of Deposit (CDs)
  • Foreign Bond Funds
  • CFD’s (contract for differences)

Hopefully you now have an idea about investing in forex online along with the advantages and disadvantages involved. If you would like to learn more, please see my how to trade forex guide.

Happy trading!