For those who want to invest some of their finances but may not have experience in doing so, the stock market can be very daunting. Navigating the market requires a strong foundation of understanding and constant research if it’s to be done successfully, and a lot of us would rather trust a mutual fund or paid portfolio manager with the job. Many, however, ultimately seek out alternative methods of investment with the potential to save and grow funds but with a little less complex than typical stock markets.
For some, that’s where the currency exchange comes into play. Better known as the forex market, the currency trade allows investors to buy and sell money from around the world in the hopes of leveraging a profit. It’s considered less complex and possibly evens lower risk than ordinary stock markets, and thus it’s a pretty attractive option for people who want to manage their own funds but don’t necessarily have the time to dedicate to learning the stock exchange.
Trading forex still requires a great deal of education and preparation, but these are some of the basics that can help you out in the early going.
How Forex Works
Really, it works the same way the stock market does, but in a more straightforward environment. As a completely hypothetical example, pretend the euro is worth $2. In an ideal forex trade, you might spend $10 to purchase five euros. You’d then hold them in the hopes that the EUR/USD pairing would go up. Let’s say after six months the euro has inflated to the point at which it’s worth $3. Now you can buy back $15 with the same five euros, effectively turning your initial $10 into $15. That’s an ideal scenario on a small scale, but it communicates the idea.
The Main Perks
In addition to being a little simpler than the stock market—just a handful of currency pairs make up almost all of the volume in the forex market—there are other features that draw people to forex on a regular basis. For instance, one analysis of the appeals of this market pointed to true 24-hour access as one of the main draws for a lot of traders. Because currency is always being exchanged somewhere in the world no matter what time it is, there’s relatively little overnight risk for a diligent trader. You can always access your account and make decisions.
High liquidity in the market is also frequently mentioned as one of the main benefits. Defined as the ability of a valued item to be transformed into currency on demand, liquidity basically amounts to whether or not you’re able to make a trade when you want to. If you’re buying, is anyone selling? If you’re selling, is anyone buying? These can be concerns in certain financial markets, but the currency exchange is the largest financial market in the world, and thus has massive liquidity. It’s highly unlikely that your trades will ever be held up because of an issue in this regard.
These are just a few of the specific perks of forex trading, but they’re two of the most frequently cited for people who are looking into currency trading for the first time.
The Charts To Know
As different as forex trading may seem from the ordinary stock market, currency pairs still fluctuate in patterns that result in charts similar to those you’d see for any old stock. And that means, as, with stock trading, it’s important to learn the types of charts that can help you to get a visual sense of a currency pair’s movements.
This is not the same as recognizing patterns in charts. As it happens, there are some commonly recurring patterns in stock charts that tend to provide traders with indications about where a stock’s price might go next. Some of these patterns may or may not apply to forex trading, but either way, it’s most important to first be able to recognize the different types of charts on which you’d find the patterns, to begin with.
If you’re going to delve into the forex market, you’ll need to recognize line charts, bar charts, and candlestick charts at the bare minimum. It’s true that, depending on your trading platform, you may be able to choose which of these types of charts you’d like to use to visualize the currency pairs you’re looking at, but becoming familiar with them all is an aspect of financial literacy that will benefit you in the long run.
The Risk You’re Taking
Finally, before you invest a penny in the currency trade, it’s important to recognize internally that you are still taking a financial risk. As mentioned, forex is sometimes described as being safer or lower risk than some other forms of investment, and in certain situations that may prove to be the case. But there are no guarantees in investing, no matter what market you’re entering. Part of the basic foundation for a good forex trader is the understanding that risk is still very much part of the game.
Your task is to offset that risk with proper education and preparation. Even the most well-prepared traders can suffer unexpected losses, but by understanding the ins and outs of the market, you can set yourself up for success.