15th Oct 2009
Forex Investing - Trading Currencies as an Investment Strategy
Investors looking for alternatives to the stock market, either because of downward trends, stagnant growth, or the pace of trading, often find themselves investigating the wild and wooly world of forex trading. Once the realm of large banks and global corporations, the forex (foreign exchange) market is now the playground of a wide range of entities and investors; some seasoned and skilled, others new and naive. Forex Investing is a bit of a misnomer. It would be more appropriate to say forex trading, because unlike the stock market where you buy and sell assets which have value in dollars, on the forex market, the asset IS the dollar, or other currency you may hold. So Forex Investing could be simplified to say investing in currency, or currencies; essentially trading forms of money. While it doesn’t carry the complexities of buying stocks, it does have its own language, strategies, and risks, which should be understood well before the first trade is made.
The Market
When you choose to dive into the world of forex investing, you may find the market to be a bit different than you are used to. Unlike stocks, where you have central trading locations called stock exchanges, forex trading is done mainly through electronic trading networks or by phone. The largest market for currencies is called the “Interbank Market”, and is dominated by large financial institutions and multi-national corporations. In contrast to buying stocks, where the market has defined trading hours, forex markets are open 24 hours a day.
Order Types
When trading foreign currencies, you have many options on what type of trade order you want to initiate. Beyond just buy and sell, these order types allow you exercise some control over your trades and manage risk in a very volatile environment. If you just want to buy or sell at the current market price, that is known as a Market Order. If you would rather trade a specific price, that would be a Limit Order. If you want to prevent catastrophic loses, you may want to initiate a Stop-Loss Order at a specific price level. If you believe the market is going to go up or down and want to enter the market then, a Limit Entry Order is for you. If you believe the market is going to continue in the same direction as it is currently, you might want to issue a Stop Entry Order. The beauty of Forex investing comes in when you combine these order types and use things like OCO orders to work a strategy. OCO Orders, or one-cancels-the-other orders, allow you to set up multiple orders and cancel one of the other is executed. GTC, or good-til-cancelled, orders are often used in conjunction with OCO orders since these orders stay in the market until they are filled or cancelled.
Types of Trades
As in buying stocks, you have long and short trade positions. If you are long, you are attempting the profit from an increase in the price of the currency, essentially implementing a buy-low, sell-high strategy. If you are short, you think the price will decrease, and are attempting to sell-high.
Trading Strategies
Forex investing comes with its own unique trading strategies, where the serious forex investor might use a combination of these strategies to hedge against the inherent market risk while realizing a solid profit. As with other markets, you have strategies based around Technical Analysis where analyzing charts and trends helps the investor predict the ebbs and flows of the market. In contrast, Fundamental Analysis studies the macro-economic indicators that are the basis for the underlying value of the currency. Trend trading attempts to ride waves or movements in the price of a currency. Swing Trading deals with trading according to short to medium term trends. Range trading attempts to find the upper and lower bounds of a currency, using a combination of analytical models, in order to trade the currency inside of the range. News Trading bases trades on news headlines and media reports. Scalping strategies deal with making very small gains on very short term trades, taking advantage of minute fluctuations in the market. Day trading is similar, except the trade periods can last longer, minutes or hours. A strategy which attempts to profit in the fluctuations of interest rates is called Carry Trading. A style of trading that involves buying and holding a currency for a longer period of time is called Position Trading.
Training
As you can see Forex Investing goes much deeper than just exchanging one currency for another, and is a whole different animal than buying stocks or bonds. It is vital that the investor fully understand the world of currency trading before risking even moderate sums of money in the market. It is advisable that the novice Forex investor take a course on forex investing or at least become familiar with some of the trading strategies via an online product like Forex Rebellion. Time, practice, and patience are essential for success with Forex Investments.
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