Investment in currencies

It is very important not to fall victim to greed, excitement, panic or fear.
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Let me share an interesting email received from a reader. “My son has been learning some forex day trading on the internet for some months now. To test his skills he invested some bucks and keenly watched the market trends. To my amusement he was also able to withdraw some money thereby convincing me that it is a good option to earn easy bucks while studying.”

Now, before allowing his son to continue the foreign exchange (forex) trading, he wanted to understand the pros and cons of such trading. In common parlance, forex trading is known as currency trading. 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. 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.

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.

Notably, the outbreak of the coronavirus impacted the worldwide markets and among other things, the virus triggered fluctuations in the value of currencies and led to the unpredictability of the currency exchange rates. It’s amid this unpredictability of currency exchange rates we witnessed investors venturing into the currency market to make profits.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.

There are certain things which one needs to know before venturing into forex trading. One should know that the value of currencies change from time to time. Even though there are various reasons, 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.

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. Once you catch hold of the market and sharpen your trading skills, expand your activity. It is very important not to 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.

There are certain factors which affect the forex trading market. The economic variables such as interest rates, inflation, GDP numbers etc 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. To be precise, it’s the economic situation which has a direct bearing on the appreciation or depreciation of a country’s currency. So, 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.

Let it be clear that forex trading can be very risky as currencies tend to be very volatile compared to other markets. 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 as a forex trader 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.

The real key to success with currency trading is to use caution and have a trading plan.

Here online trading also merits mention. This kind of trading is turning out as an illness among the investors as they continue to indulge in online trading of stocks despite losing substantial sums in the market.

If you are an investor and find yourself unable to control your online stock trading coupled with emotional, financial and social consequences mounting, then that’s not a passion for trading. It’s simply an addiction. So what to do? In order to clear yourself as not a trading addict, you should ask yourself a few questions? Do you enjoy the challenge of trading even more than making money? Are you a big risk-taker? Are you willing to put large sums of money on a few stocks, depending on margins and on other credit lines for investing? Do you resort to bigger risks to erase your losses? Is it that the first thing you do when you get up and last thing before you go to sleep is check the position of your stocks? 

If your answer to these questions is affirmative, then treat yourself as a victim of online trading addiction.

I haven’t seen people talking about this kind of affliction, but the addicts suffering from uncontrollable online stock trading are no less serious than what ails the gambler who can’t stay away from gambling. While talking in the local context, I have seen online traders here who do nothing else but remain busy in trading stocks and their tendencies are of a compulsive gambler.

What we need in the field of trading business is a group of counsellors who can help out in de-addiction of these online share trader addicts. Some acquaintances are known to me who were addictive traders, lost lots of money and somehow managed to come out of the addiction. And I think these self-de-addicted traders can prove fruitful counsellors. Because they have tales of sufferings to tell, as they ‘believe they were not merely trading shares but gambling their own money’.

Actually, the stock market is not a place for gambling. But it’s the approach of people which has turned these exchanges into the gambling den. The situation here is alarming as compulsive online traders are overwhelmingly young and are big risk-takers and trade heavily on margin (using money borrowed from their brokerage).

While discussing the online trader addicts, I don’t mean everyone is so. Of course, many investors could fit that profile, but we cannot classify them as addicts. Buying and selling of shares doesn’t necessarily mean an investor has a problem. One of the legitimate ways to carve out a living in the stock market is day trading, even if it’s inappropriate for most people. But it’s converted into a problem only when one is unable to stop himself from day trading even when he’s consistently losing his hard earned money. So, one shouldn’t indulge in trading shares or currencies as a game rather one should use it as a vehicle to earn a living.

Let me conclude with an apt 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.”

(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.

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