How to Make an Investment in Foreign Exchange Market?

In this article, we will understand about Foreign Exchange Market and How to Make an Investment in Foreign Exchange Market.

June 13, 2022 - 10:54 AM 514 views

How to Make an Investment in Foreign Exchange Market?

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Did you ever invested in the foreign currency market? If not, let’s start with basics!

What is Foreign Exchange Market?

The foreign exchange market (FX) is similar to any other market, except that instead of selling food and goods, participants trade dollars or currencies of different countries.

What is Forex broker?

The currency market can be traded by anyone, but it is only available through brokers, or middlemen. In essence, a broker is your "hands" on the foreign currency market, providing you with access to the market.

What is a Currency pair?

On the foreign currency market, currencies are exchanged in pairs, such as the Euro and the US dollar (EUR/USD). Do you want to exchange Euros for dollars? Press "Buy" to initiate the EUR/USD trade. Do you want to exchange Euros for dollars? Select "Sell" in the same way. It's simple; just keep in mind that your action always pertains to the pair's first currency.

How to earn money on Forex market (FX)?

People would buy a currency pair at a lower price and sell it at a higher price, with the difference between the Buy and Sell prices representing their profit. Spread is a small commission that the broker receives from your trades.

Consider the following scenario:

Assume you have $100 in your trading account and wish to trade the EUR/USD currency pair. It has a 1.25 exchange rate, which implies that 1 Euro is worth 1.25 US dollars. The exchange rate is similar to a grocery shop price tag; the only difference is that the price tags on foreign currency market are constantly changing.

Then you make a prediction, such as that the Euro will climb against the US Dollar.

Then, for your $100, you buy 80 Euros and wait for the exchange rate to adjust.

Let's say it increased from 1.25 to 1.35 – this is a profitable situation for you, therefore you can exit the transaction now. You may now convert your 80 Euros for 108 dollars, netting an $8 profit.

If you think this amount of money isn't worth your time, there's good news: your broker can use a special instrument called leverage to help you make a lot more money. Leverage is money borrowed from your broker to multiply your initial investment.

On example, if you utilized 1:3000 leverage at FBS for a comparable trade as in the previous example, you would make $2400 in one trade. So, you invest $100 and trade $300.

How do you create predictions?

Finally, how do traders decide which foreign currency pairs to trade and when to purchase and sell them?

The value of a currency is determined by supply and demand, which can fluctuate based on the country's economic status (GDP, inflation, the labor market situation, etc.). As a result, political, economic, and social factors affecting the local economy also affect currency rates. The key to successful foreign currency exchange market is to understand HOW these elements affect profitability.

There are two key tools that can be used to determine the ideal time to buy or sell.

Start with a Demo/Practice Account

Most major trading platforms include a practice platform where you may practice trading without risking any of your hard-earned cash. It would be a good idea to take use of such a platform in order to avoid wasting money while learning. You can learn from your mistakes while you practice trading so that you don't make them in real-time trading.

Begin by making small investments

After you've had enough practice, starting small with real-time foreign exchange market trading is a good option. Investing a large sum of money in your first trade might be perilous, as it may cause you to make rash decisions that end in you losing money. It would be beneficial to start with small quantities and progressively increase the lot size over time.

Keeping a Record

Keep track of your successful and unsuccessful trades in a journal for future reference. This will help you remember previous lessons and avoid making the same mistakes.

Foreign Currency Exchange Market in India

The SEBI regulates the Indian foreign exchange market, which follows the RBI's 'Currency Exchange Trading in India RBI Guidelines.' Individuals are not permitted to provide margin money for trading or use money moved overseas for speculative purposes under the RBI's Liberalized Remittance Scheme. Retail foreign exchange traders in India are not permitted to trade in cash. The National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and the Metropolitan Stock Exchange of India Ltd promote currency trading in India.

Due to these restrictions, India's foreign exchange market is fairly modest in compared to other established economies. It is limited to only four currency pairs: the Euro (EUR), the US Dollar (USD), the British Pound (GBP), and the Japanese Yen (JPY), and an investor can trade between them by opening a trading account with a trusted SEBI registered broker or through SEBI authorized reputed online foreign currency exchange trading platforms.

How to Make a Foreign Currency Trading Strategy?

Trading without a strategy is like sailing without a compass: you'll get lost battling the waves if you don't know where you're going. As a result, try to put together a foreign currency trading strategy that you've tested and found to be generally profitable and easy to follow.

Money management and risk assessment procedures should be an integral aspect of any trading strategy. Choosing trades with appealing risk/reward ratios, as well as appropriately sizing your transactions in respect to the amount of money in your trading account, will help you improve your trading performance and manage your risk.

Other parts of trading you'll need to master include taking essential losses quickly and recovering emotionally from trading losses. Remember that hope and fear are a trader's worst enemies: poor traders are afraid of losing money and hope that the transaction will return to profitability. Instead of reacting to such hopes, they should react to the far more realistic dread of having to incur an even bigger loss if they don't act.

A stop-loss order should be in place, or you should intend to reduce your losses at the foreign exchange market if you're following it closely, to prevent a losing transaction from exceeding your predetermined threshold of pain.

While creating a trading strategy takes time and effort, you can save time by joining a social trading platform and copying the transactions of another trader in your account who has a proven track record.

Additional Tips to Create a Foreign Exchange Market Strategy

Period of time

It is critical to select a time frame that is appropriate for your trading style. There's a big difference between trading on a 15-minute chart and trading on a weekly chart for a trader. If you want to become a scalper, a trader who profits from little market movements, you should stick to the lower time frames, such as 1-minute to 15-minute charts.

Swing traders, on the other hand, are more likely to generate profitable trading chances using a 4-hour chart as well as a daily chart. As a result, before deciding on your favorite trading technique, consider the following question: how long do I want to stay in a trade?

The Number of Trading Options

Different trading techniques correspond to different time periods (long, medium, and short-term).

When deciding on a strategy, you should ask yourself, "How often do I want to open positions?" If you want to open a large number of positions, a scalping trading method is the way to go.

Traders who invest extra time and resources examining macroeconomic reports and fundamental issues, on the other hand, are more likely to spend less time in front of charts. As a result, higher time frames and larger positions are part of their favored trading technique.

Position Size

The importance of determining the right deal size cannot be overstated. Successful trading methods necessitate an understanding of your risk appetite. Risking more than you can afford is dangerous since it can lead to larger losses.

Setting a risk limit at each trade is a frequent piece of advice in this regard. Traders, for example, usually set a 1% limit on their trades, which means they won't risk more than 1% of their account on a single trade.

If your account is worth $30,000, for example, you should risk up to $300 on a single trade if your risk limit is set to 1%. You can change this restriction to 0.5 percent or 2 percent depending on your risk appetite.

In general, the larger the position size should be the fewer trades you are trying to open, and vice versa.

Foreign Exchange Market Terminology

Every market has its own dialect. Before you start trading forex, familiarize yourself with the following terms:

A pair of currencies: A currency pair is used in every foreign exchange market deal. There are other less typical trades in addition to the majors (like exotics, which are currencies of developing countries).

PiP:  The smallest conceivable price movement within a currency pair is referred to as a pip, which is short for percentage in points. A pip is equal to 0.0001 since forex prices are stated to at least four decimal places.

Bid-ask spread: It is the difference between the highest and lowest bids. Exchange rates, like other assets (such as stocks), are decided by the greatest amount buyers are willing to pay for a currency (the bid) and the minimum amount sellers must sell for (the ask). The bid-ask spread is the difference between these two figures and the price at which deals will be conducted.

Lot:  A lot, or standardized unit of currency, is used in foreign currency trading. The standard lot size is 100,000 currency units; however micro (1,000) and mini (10,000) lots are also available for trading.

Threats of Foreign Currency Exchange Market

Currency prices fluctuate constantly, but only in small increments, requiring traders to conduct massive deals (using leverage) in order to profit.

If a trader makes a winning wager, this leverage can greatly increase profits. It can, however, increase losses to the point where they exceed the original loan amount. Furthermore, if the value of a currency falls too far, leverage users may face margin calls, forcing them to liquidate stocks purchased with borrowed cash at a loss. Aside from potential losses, transaction charges can build up quickly and eat into a profitable trade.

Furthermore, keep in mind that those who trade foreign currencies are small fish in a pond of experienced, professional traders, and there may be potential for fraud or information that will confuse newcomers.

It's perhaps for the best that forex trading isn't very popular among individual investors. According to estimates from Daily Forex, retail trading (also known as non-professional trading) represents for only 5.5 percent of the global market, and some of the largest online brokers don't even offer foreign exchange market trading. Furthermore, the few retail traders that engage in foreign currency exchange trading find it difficult to make a profit.

The Last Word 

Forex is an interesting location to invest, but it is a more specialized section of the market. Before dabbling with currencies, new investors should start with less hazardous investments.

Foreign currency trading, like any other investment, has risks and rewards. Before making a decision, you should consider all of your possibilities. Look for a brokerage that offers paper trading, which operates similar to a stock market game, to check out forex without risking any real money. When you're ready, go to your preferred brokerage to get started.

Read More Article:

How to invest in Foreign Exchange Market (FX) Step by step in 2022

How to invest in forex market in 2022

What is the Best Way to Make Money Trading Forex?

In Detail, What Is The Forex Market (FX)?

In the Forex Market, What is actually traded?

Currency Pairs: Buying and Selling

In the Forex Market (FX), What Is A Lot?

What is a pip in forex trading?

The Different Types Of Forex Trading

Forex Market (FX): It’s Size and Liquidity

When to Buy and When to Sell a Currency Pair

Forex Trading For Beginners: A Guide To Making Profits From Currency Trading

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