Currency investing is essentially betting that one country’s economy will be stronger than another’s, and when done right, it’s a very effective strategy. If you are considering currency investments for the first time, here are a few important tips to help you improve your strategy and avoid any big losses.
Consider Using A Broker
The majority of trading happens on a day-by-day basis, which means that your success depends on your knowledge of different industries and assets. Currency trading or Forex trading is no different and investors are able to trade currencies 24 hours a day on weekdays, so there is the potential for some big profits.
However, you will only make those big profits if you have an in-depth understanding of the global market, which many people do not. Even if you have experience in other investment strategies, that doesn’t necessarily mean that you have the knowledge to successfully trade currencies, so you should consider a broker. Unless you are completely confident that you know what you are doing, you should find a Forex broker and have them handle the day-to-day trades for you.
When searching for a broker, make sure that you use a reliable one that is authorized. In the US, all reliable Forex brokers should be a member of the FINRA (Financial Industry Regulatory Authority) and they should also be registered with the Securities and Exchange Commission. There are so many brokers out there that claim to be legitimate but, unless they have these credentials, you shouldn’t hand your money over to them.
Stick To Major Currencies
New investors often make the mistake of investing in more volatile currencies because there is potential for a higher return. Argentina, for example, used to be a very popular trading currency but when an international crisis shut down the banking system in the 2000s, a lot of people lost their money. Although these volatile currencies may seem like an attractive prospect, the risk is not worth it and you are far more likely to lose big money. It’s much safer to stick to major currencies in countries that have a stable government. Political turmoil, international relations issues, and financial problems will all devalue a currency very quickly, so steer clear of any countries that are likely to experience any of these things. Instead, look at the biggest global economies that are seeing steady growth and are unlikely to experience any major financial issues in the near future. Although the returns on these currencies will be smaller, the risk is also far lower.
Invest For The Long Term
If you are looking for an investment opportunity with a quick turnaround, currency is not the best choice. In the short term, currency investments are one of the most volatile investment options. Things like inflation, GDP, unstable governments, corruption, employment rates, and nationalization can all have a big impact on the value of a currency and they tend to fluctuate a lot. If you want to make successful short term currency trades, you need to have an in-depth knowledge of international politics and economics, as well as an understanding of local factors in the countries that you are invested in. Your broker will be able to help with this to some extent but they are more likely to be focused on long term investments. If you are willing to invest for the long term and you set realistic expectations about your investments, the risk is reduced in a big way and you stand a much better chance of seeing any meaningful returns.
Consider An ETF Or Mutual Fund
ETFs and mutual funds are another effective way to reduce the risks involved with currency investing. ETFs or exchange traded funds group together a collection of different investments and trade on a daily basis, so their rates fluctuate throughout the day. You can buy and sell an ETF during the trading day, just like you would with stocks, but the main benefit is that all of the research is done on your behalf. You simply need to decide when to buy and sell your ETF and you can leave all of the specific currency trades to the experts.
A mutual fund adds your investment to a pool with a lot of other investors and makes various trades using that pool, with each investor taking their share of the profits. If you invest in mutual funds or an ETF, you can spread the risk and reduce the chance of making a loss in a big way. You can also let somebody else with more knowledge and expertise handle all of the hard work for you, so it’s a great option if you are new to currency investing.
Be Careful With Leverage Currency Investments
Many companies offer leverage currency investments, which essentially means that you borrow from your Forex broker to make your investment. This does allow you to make larger investments but, in most cases, it should be avoided. However, even though this strategy can amplify your profits in a big way, it can also amplify your losses. When trading in something like currency, which can be very volatile, this is a huge risk. If you can afford to absorb the losses and you are willing to take the risk, then you may consider this strategy. However, if you are not prepared to absorb large losses and you want a low risk, low reward currency investment, you are much better off going with a mutual fund or ETF, or investing directly through a Forex broker.
Currency investments are a popular way for investors to expand their portfolio and when done right, they can be very effective. However, successful currency investing requires a good knowledge of global economies and international relations, and short term trading can be very risky. But if you hire a reliable broker and invest for the long term, you should see some meaningful returns.
This is a contributed post.
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