While the foreign exchange is among the most volatile financial markets at the best of times, it is particularly changeable during periods of wider economic austerity. The current market provides a relevant case in point, with the ongoing Eurozone crisis and significant decline in the Chinese economy placing a huge strain on investors. Such circumstances are usually the trigger for a number of short-term measures, which are designed to manipulate the financial markets and drive an economic recovery.
The State Bank of Vietnam (SBV) recently made a move to curb dollar hoarding, for example, in a bid to increase confidence in the dong. The issue with this and similar measures such as the tightening of foreign currency transactions is that they are entirely unsustainable, meaning that they will stabilise the forex market for a brief period of time only. Without a longer-term outlook and strong fiscal policy, the foreign exchange remains susceptible to the threat of volatility and sudden change that constantly stalks it.
The Lure of the Forex Market
When you consider the impact of economic uncertainty and short-term thinking, it is hard to understand the universal appeal of the forex market. With even Santa Claus facing bankruptcy thanks to a significant drop in tourism revenue, the economy is scarcely likely to gather any further momentum during the final quarter of 2015, while the Central Bank has also warned of a potential global recession in the next 18 months. Despite this, the average daily volume of forex traders increased by nearly a third between 2010 and 2013, delivering a staggering output of $5.3 trillion.
There are many factors that drive this popularity, not least the derivative nature of forex trading and its marginal returns. This is based on the leverage that is offered by the foreign exchange, which means that traders can control vast amounts of capital with a minimal investment. Although this brings innate risk, it also offers considerable rewards, potentially huge returns and the chance to operate at a huge profit margin. This makes forex trading extremely alluring, even during times of economic hardship and austerity.
How to Trade Forex in 3 Easy steps
If you are tempted to invest your money into currency, however, you will need to understand these risks and formulate a viable strategy. Here are some practical steps that can help you to achieve this: –
Understand the Alternative ways of Trading Forex
Before you begin to trade forex, it is imperative that you understand the different methods of investment. This will have a significant bearing on your output as a trader, while your decision should also be influenced by your prevailing level of experience and existing skill-set. The first (and most common) method of trading is the simple process of buying and selling currency pairs, which requires you to go long on one currency and short on another.
The second way is a little more complex, and involves purchasing derivatives that track the movement of a chosen currency pair. This is noticeably similar to the trading techniques used in the equities market, while it is best suited to individuals with some prior experience of investing on the open markets. Conversely, beginners may want to focus on buying and selling currency pairs, using trend analysis to inform their decisions and profit even in a depreciating marketplace.
Partner with a Viable Brokerage Firm
With a clear understanding of the market and how you intend to trade currency, the next step is to partner with a reputable and viable brokerage firm. The online broker market is saturated with choice and alternative services, so it is important that you compare your options in detail and consider firms based on carefully selected items of criteria. One of the key things for beginners to look for is the option of a demo account, as this will enable them to hone their burgeoning skills in a risk-free and simulated market environment.
For more experienced investors, there is a need to appraise more technical aspects of the services available. More specifically, it is wise to check the leverage available when executing orders, as this will have a direct impact on the amount of profit you can expect to generate from each transaction. ETX Capital is a brand renowned for offering prime leverage rates, for example, meaning that traders are only required to commit a fraction of the market price in order to the order.
Utilise the Technological Tools at your disposal
Over time, you will become accustomed to the constantly evolving range of technical and analytical tools offered by online brokers. These can appear daunting at first, but as you gain experience they can become invaluable tools in your quest to analyse historical and current market trends, execute informed trades and pre-empt any future developments. Some of these tools are more influential than others, with the stop-loss order perhaps the most impactful.
This feature is available across all major online brokers, and this can be used to help manage open positions while minimising the risk of financial loss. Essentially, it enables traders to determine precisely how much a specific currency pair rate can depreciate before their position is closed, instantly minimising losses and preventing further damage. This should take pride of place within a comprehensive suite of trading and analytical tools, as you look to operate responsibly and make the most of your operating capital in a volatile market.