Investing in currencies
Let me begin today’s straight talk with a famous quote of Kevin O’Leary , a well known Canadian businessman, author and television personality.
He said, “Money is my military, each dollar a soldier. I never send my money into battle unprepared and undefended. I send it to conquer and take currency prisoner and bring it back to me.”
In investment matters, every penny is invested to get multiplied and get a decent return on investment to the investor. Among other investment options, such as investment in equities etc. there is an interesting option for the investors to invest in various currencies and make profits out of their fluctuating prices.
All of us are aware that the outbreak of coronavirus pandemic has been extraordinary. Its impact on the worldwide markets has been enormous and among other things, the virus triggered fluctuations in the foreign exchange.
It’s worth mentioning that the currency exchange rate is considered as one of the major important indicators of economics and the ongoing pandemic has led to the unpredictability of the exchange rates. It’s amid this unpredictability of currency exchange rates where investors venture into the currency market to make profits.
What I am talking about is making money out of money. We have to understand that political and economic developments have a great impact on the value of currency of a country.
Currencies when viewed in terms of investment matters tend to be very volatile compared to other markets. It’s here currency trading assumes significance.
You must have observed whenever the Indian rupee witnesses a steep fall in value against the US dollar, investors immediately get into play to capitalize on the falling rupee to make profits.
Notably, there are almost as many different currencies as there are countries, but the most popular currencies for trading are the US Dollar, the Euro, the British Pound (Sterling), and the Japanese Yen.
Today, the currency markets are some of the most popular day trading markets, and they therefore have some of the highest volume (number of contracts) and liquidity.
This high volume and liquidity makes the currency markets attractive to all types of traders, including individual day traders, trading companies, financial and non financial companies, banks, and governments.
What is this currency trading?
Basically, the idea that trading money can earn you money seems counter intuitive. Actually there’s a lot of money to be made in this kind of trading. I have observed lots of people engaged in currency trading without even realizing it, as a matter of fact.
For example, every time a person visits another country and swaps his country’s currency for the local currency, he’s involved in currency trading. From an investment point of view, currency trading is known as foreign exchange, or forex.
Although forex is the largest financial market in the world, it is relatively unfamiliar terrain for individual/retail traders. Just a few years ago, foreign exchange business was primarily the domain of large financial institutions, multinational corporations and secretive hedge funds.
But with the advent of the internet, times have changed. Now individual investors have ventured into this market and more and more people are hungry for information on this fascinating currency trading market.
In short, currencies are the money of different countries, and currency trading is the buying and selling of these currencies.
How to be a currency trader?
To be a currency trader, you should know that the currency values change from time to time and the reasons are many. Political and economic activities have a great impact on the value of currency of a country. Sometimes they are driven by speculators, and sometimes they are driven by international business flows.
For example, if companies in India are importing large quantities of products made in the US, they will need to exchange their rupee for US dollars to pay for the products.
When this is done in very large quantities over a short period of time, it raises the demand for US dollars and the value of the US dollar versus the Indian rupee increases.
So, in short, currencies are the money of different countries, and currency trading is the buying and selling of these currencies. There are almost as many different currencies as there are countries, but the most popular currencies for trading are the US Dollar, the Euro, the British Pound (Sterling), and the Japanese Yen.
Meanwhile, one of the best tips for trading currencies is to begin with small sums, and low leverage, while adding up to your account as it generates profits.
Keep in mind that a larger account will not necessarily allow you greater profits. Focus on a single currency pair and once you catch hold of the market and better your trading skills, expand your activity.
Last but not the least, restrain your emotions, which means don’t fall victim to greed, excitement, panic or fear. Being logical in your approach and showing less emotional intensity will surely lead you to successful currency trading.
What are the factors which affect the currency trading market?
There are certain economic variables such as interest rates, inflation, GDP numbers etc that have a direct impact on the value of currency of a country.
Even unemployment rate, fiscal deficit, manufacturing indices, consumer prices etc. also impact the value of a currency. Precisely, it’s the economic situation which has a direct bearing on the appreciation or depreciation of a country’s currency.
Precisely, a country’s economic indicators play a pivotal role in determining the value of its currency. And of course, political stability too has its own impact on the currency in the foreign exchange (Forex) market).
What are the risks associated with currency trading?
All of us are aware that a risk element is there in every business. And currency trading cannot be isolated from risk. In other words, currency trading can be very risky. Currencies tend to be very volatile compared to other markets. The real key to success with currency trading is to use caution and have a trading plan.
Currency trading has caused heavy losses to many investors. Reason has been their inexperienced and undisciplined approach to trading. It is very important for you to understand your needs backed by risk tolerance capacity to avoid disasters and maximize your potential in the currency exchange market. Once you plan your goals, stick to your plans - a timeframe and a working plan for your trading.
For a beginner in currency trading, choosing a broker needs utmost care. Otherwise a fake or unreliable broker will invalidate all your gains acquired through hard work. Just check that your expertise level and trading goals match the details of the offer made by the broker.
(The views are of the author & not the institution he works for)
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK