Forex market is the most liquid financial ecosystem on the face of the earth.
It spans 170 different currencies and exceeds $5.3 trillion in daily volume. That’s 53 times greater number than the number New York Stock Exchange boasts.
Currencies float freely against one another and that’s where potential rewards lie. Another huge investor magnet is high leverage. This means you can easily enter and exit a position for a small spread of your choosing.
Essentially, you bet against one currency by investing in the other currency in the pair. This may sound simple, but we have to break it to you. Forex investment is both highly risky and complex.
Those who want a shot at fortune have to look at a bunch of indicators and macroeconomic drivers. It all comes down to successfully predicting currency movements and taking action promptly.
So, here’s how to make Forex trading work as a long-term tactic.
Forex Investment Basics
Forex market hinges on an electronic network of banks, which operates around the clock.
The biggest players are commercial and investment banks that trade on behalf of clients. This domain is called the interbank market.
It’s highly regulated and has established internal processes for addressing credit and sovereign risks. Laws of supply and demand determine pricing mechanisms. Rogue traders have a marginal influence on the outcomes.
But, the internet revolution has leveled the playing field. It has opened the market to a legion of new individual investors.
Due to this high leverage, they can occupy large positions with very little financial means of their own. It’s not unusual to see leverages as high as 100:1.
Therefore, swing and day trading in small amounts is easier to accomplish than in other markets. A lion’s share of trading volume is generated by speculators.
But, this doesn’t mean Forex trading is their exclusive privilege. Many people have made a fortune working with longer horizons and bigger funds.
They operate as positional traders. The basic idea behind it is simple. You identify a trend and then follow it for weeks, months, or even years.
What you need to predict is where the currency will go and how large the price movement will be. It’s a game of patience and planning.
The Art of Risk Management
Like it or not, Forex isn’t a way to get rich quick.
It’s more of a marathon than a sprint. You patiently build your portfolio over a long haul. Going in fast and leveraged is an approach that backfires more often than not.
It goes without saying you need in-depth knowledge and a lot of preparation to execute this strategy. But, before we get to that, let’s address the risks that loom.
For instance, some segments of the market are also more loosely regulated than others. Likewise, instrument standardization is poor in certain parts of the word.
Unscrupulous activities are rife and brokers can re-quote prices. Sometimes, they even trade against their own customers.
That’s why it’s important to investigate brokers you’re dealing with.
In particular, figure out where they are regulated. In the US and UK, there’s much more oversight and reregulation is stringent. You can also count on some level of account protection in case of market crashes and dealer insolvencies.
Another major risk is the inherent volatility of currency pairs.
Large deviations of exchange rates are a common sight. Pairs can move several hundred pips in a matter of a single day. These twists and turns reflect supply and demand but are extremely hard to predict.
To make it even trickier, obtaining sufficient and reliable information is harder than it may seem. Countries like China aren’t really transparent when it comes to public debt, stock trading, and real estate market.
Big Picture Trading at Its Best
Despite these hurdles, you need to grasp the big picture.
This is to say factor in all available information on a currency pair. Going through the headlines and internet forums doesn’t cut it.
Thorough research is the way to go.
Keep up with the commanding drivers of the economy, also known as fundamentals. This set of factors encompasses things like CPI, tourism, economic strength, geopolitics, and employment rates.
They shape supply and demand for currencies.
Furthermore, notice interest rates are a key piece of the puzzle. They fluctuate depending on the currency you hold and direction of trade. Over time, a rollover effect kicks in, meaning you either pay or earn a bit of interest.
Rates of inflation are an important consideration as well. They affect the amount of return you score. So do the taxes.
For example, futures investors need to mind the 60/40 rule. It refers to tax ratio of long-term capital gains/losses and short-term gains/losses. On the other hand, over-the-counter investors are taxed under different IRS section contracts.
So, you want to grasp your financial obligations and play by the book.
Seek professional services if you’re unable to do it yourself. Namely, this useful company can help you with tax relief and filing. It has a solid track record and reputation.
Once you’re clear on fundamentals of big-picture trading, set the wheels in motion. Strive to make fewer transactions that yield greater returns.
Aim at a minimum of 200 pips per trade and buy stronger currencies against weaker currencies. Get on top of market trends and stick to your strategy.
That’s the way to build a rock-solid portfolio while staying on the safe side.
On Top of the Game
There’s plenty of evidence you can accomplish long-term success with Forex trading.
However, you need to take measures to protect yourself. Forex investment safeguards are inconsistent across the world. Currencies don’t move in line with your forecasts because you wish it so.
Therefore, set your biases and assumptions aside. Always do your research to minimize the risks.
Keep close eyes on economic fundamentals and indicators. Understand how their interconnectedness shapes your prospects. Purchase based on well-grounded expectations and sell according to facts.
This kind of educated decision-making supports positions you’re holding and gradually elevates your portfolio.
If you need more insights and training on smart investment, check our courses. Become a patient master of big picture trading and learn to play it smart.