Nowadays the financial markets have become easily accessible even to medium and small investors, who in a few clicks can buy or sell almost any currency in the world. Most of these currency investments are made through the Forex market (the world market for trading currencies). It is a market open 24 hours a day, 5 days a week. With the right technical preparation related to the functioning of this financial sector (and a bit of luck) it is possible to invest profitably in the Forex market.
Steps
Part 1 of 2: Forex Basics
Step 1. Examine the exchange rate for the currency you wish to buy based on the one you are going to sell
Look at the historical chart of the currency pair you have chosen to understand how the exchange rate has fluctuated over time.
- Exchange rates are quoted and expressed on the basis of currency pairs. The exchange value indicates the relationship that binds them, that is, the amount of the purchased currency based on that of the sold currency. For example, let's consider one of the most traded securities: EUR / USD (euro versus dollar); if the exchange rate is 1, 2, it means that you will receive 1, 2 US dollars for every euro sold.
- The exchange rate of currencies is constantly fluctuating. From a political instability of the government to a natural disaster, any event can affect the exchange rate of a particular currency. Make sure you are clear that the rate at which currencies are traded in the financial market is constantly changing.
Step 2. Develop an investment strategy
To make a profit from your investments, you need to focus your attention on currencies that you think will increase in value (base currency) against a second currency, which you think can depreciate (quoted currency). For example, if you think that currency A, which is currently quoted at € 1.50, could increase its value, you can buy a certain amount of that currency (in this case it is called a "call contract"). If the value of this coin rises to € 1.75, you have made a profit.
- Evaluate the likelihood of a large change in the exchange rate in currency pairs. When a state's economy is thriving and growing, the value of its currency is much more likely to remain stable or rise than that of other states' currencies.
- Specific factors such as the interest rate, the value of inflation, the amount of government debt and the political stability of the government can affect the behavior of a currency's exchange rate.
- Changes in economic indicators, such as the consumer price index (or CPI from the English Consumer Price Index) and the composite index of manufacturing activity (or PMI from the English Purchasing Managers Index), may signal that the value of the currency reference is about to change.
- For more information, see this article.
Step 3. Understand the risk involved in financial investments
Buying and selling currencies means carrying out complex operations, full of unknowns even for the most experienced investors. Most people who trade in the Forex market use leverage. It is an instrument that allows you to invest more money than you own (in this case the money is "lent" by the financial institution that carries out the operation which uses the money owned by the investor as collateral). For example, if you need to buy € 10,000 of a certain currency, you can do so using a leverage of 100: 1. In this case, to be able to carry out the operation, you just need to have a margin account with an active balance of only € 100. However, if the value of the exchange does not move in the direction you envisaged, having used leverage, you would lose all your money in no time, even in the face of very small price movements (brokers encourage this type of strategy because allows you to earn much more money than the futures or stock market).
- Precisely because the Forex market is a very liquid market, where foreign exchange prices vary very quickly, sometimes even within a few hours or even minutes, it can be very difficult to calculate when and how much money to invest in each single operation.
- For example, in 2011, in a single day, the US dollar (USD) lost 4% of its value against the Japanese yen (JPY), recording an all-time low, before rising by 7.5%.
- Precisely for this reason, only 30% of private investors are profitable (some statistics indicate a much lower percentage).
Step 4. Open a "demo" account with one of the many online brokers on the web and start practicing
Direct experience is everything, in this way you will have the opportunity to understand how the mechanisms related to financial transactions related to Forex work directly from your mistakes.
- Brokers such as FXCM, through their sites, allow you to make investments on the Forex market using demo accounts that exploit virtual money, which allows you to practice without fear of losing your money.
- Before making an investment with real money, wait until you are ready, that is, to be profitable in the long term through your demo account.
Part 2 of 2: Buying and Selling Currency
Step 1. Obtain a cash amount of your local currency
You will need them to be able to convert them into other existing currencies.
To get liquidity, you can sell other assets that make up your investment portfolio. You can decide to sell shares, bonds or shares of the funds you own or you can decide to withdraw a sum in cash from your deposit account or directly from your checking account
Step 2. Find a broker who specializes in the Forex market
In most cases, private investors execute their transactions using the services of an intermediary (broker).
- Online brokers, such as OANDA, offer simple and intuitive GUI applications with which you can buy or sell currency in just a few clicks (the platform that OANDA provides is called fxUnity).
- There are other financial companies, such as FXCM or Saxo Bank, which allow you to invest in the Forex market directly online.
Step 3. Focus your attention on those brokers who offer lower spreads
Brokers that allow you to invest in Forex do not charge commissions on executed transactions. Their gains come from spreads, which is the difference between the price at which a given currency can be sold and bought.
- The higher the spread, the more money you will have to pay to the broker to execute your order. For example, if your broker sells 1 euro at US $ 1.15, but buys 1 euro at US $ 1, it means that they apply a spread of US $ 0.15.
- Before opening an account with a broker, review their website or that of the company to which they belong to make sure they are licensed to operate and are regulated by CONSOB.
Step 4. Start trading with the selected broker
You should have a tool (software or otherwise) that allows you to keep track of all your investments. Do not execute too many trades at the same time (called "overtrade" in jargon) and do not trade with an excessive amount of money. Industry experts recommend performing single trades involving a maximum of 5-10% of the total liquidity of your account.
- Before executing the trade, pay close attention to the evolution of the exchange rate of the selected currency pair over time. By adapting to the market trend, rather than "going against it", you will be more likely to profit from your trades.
- For example, assume a scenario where the euro is constantly depreciating against the US dollar. Unless you have a valid reason for doing the opposite, you should choose to sell euros and buy dollars.
Step 5. Set the stop-loss for all trades you make
The stop-loss is a very important tool in any investment and especially in Forex. Through the stop-loss the open position is automatically closed (for example by selling the purchased currency) when the price reaches a certain preset value. In this way, a limit is placed on the amount of money that can be lost in the event of a sudden price change or the non-occurrence of the hypothesized scenario.
- For example, if you bought Japanese yen for US dollars and the current exchange rate is ¥ 120, you can set up an initial "stop" order at a price of ¥ 115 per US dollar.
- The opposite instrument to the stop-loss is the "take-profit", which once set automatically closes the open position (by selling or buying the relative currency) when the exchange rate touches a certain price. In our example, you might think about setting up a "take-profit" order that automatically liquidates your position when the exchange rate reaches ¥ 125 per dollar. This mechanism guarantees you a certain profit if the price reaches the expected value.
Step 6. Keep track of the costs related to every single transaction performed
In almost all the States, the profits deriving from financial investments are taxed, it is therefore necessary to keep track of this information in order to fulfill tax obligations.
- Take note of the price you bought a particular currency for, the price you sold it for, and the opening and closing date of the position.
- At the end of each year, most brokers send a detailed report that contains all relevant information relating to each transaction performed.
Step 7. Limit the amount of money you invest in any single trade
Generally speaking, given that the Forex market is very liquid and unpredictable in its movements, experts in the sector recommend carrying out operations that involve minimal percentages of the total liquidity of the account.
If the scenario you have assumed has not occurred and your investment is at a loss (and statistics show that 70% of private investors find themselves in this situation), limit the amount of money you invest in each single trade and the percentage of your portfolio that you decide to invest in the Forex market. This way you will be able to limit the damage
Warnings
- Do not perform transactions based solely on rumors that indicate an imminent collapse of a specific currency. If you have reliable information on the possible future market trend, you can use it to implement a profitable strategy for buying or selling a particular currency. However, remember that traders who base their trades on hunches or emotions tend to lose their money.
- Never invest more money than you are willing or you can afford to lose. Remember that investing in the currency market is always very risky, even when you think you have great information and a solid investment strategy. Nobody can predict with absolute certainty how the market will move.
