Essential Rules of Investment in Forex

Essential Rules of Investment in Forex

by Madhuri Boinwad

Investing Forex is distinguished by its benefits, incomparable with other types of deposits. You can earn tens of times more than you invested. Unfortunately, this also applies to losses. Basically, it all depends on the willingness to take risks, the availability of a strategy and your level of knowledge.

What is the Best Investment in Forex?

It makes sense for a novice investor from India to invest in stocks of American and European companies. And distribute the assets of your portfolio by adding different currencies to reduce exchange rate risks and get interest on deposits. 

Forex is a great place to invest, but due to the volatility of this market, it is necessary to have the skills and experience of successful trading. Novice investors can start with less risky assets before speculating in currencies. For example, try your hand at the stock markets.

Forex brokers will not allow you to speculate with real money until you make a minimum deposit, which usually ranges around $100. Sometimes brokers do not require a minimum deposit, so in theory, you can invest $1. If you try to make money in Forex with a small amount of money, you will quickly run into problems starting with the minimum position size and maximum leverage.

Investment reliability depends on the intermediaries and trading platforms that the investor chooses. For example, the most reliable terminal is MetaTrader 4, or you can download MetaTrader 5 (modified and improved version). There are bad players and substandard products in the industry with extremely high risk, which can be amplified by margin trading. Therefore, you need to trust only reliable brokers.

Rules to Start Investing in Forex

A step-by-step plan on how to invest in Forex looks like this:

  1. Open a brokerage account. You need a foreign currency account. If you have not chosen a broker yet, we recommend that you do so in advance. The main selection criteria are: 
  • licence availability, 
  • country of registration,
  • physical offices, 
  • reputation.

Consider Forextime to be sure that your broker is reliable.

  1. Fund your account. Deposit cash in a convenient way to invest in Forex. 
  2. Develop a Forex strategy. You should not just buy pounds or yuan based on intuition. Study the economic outlook and make a purchase of currency based on efficient trading strategies.
  3. Place an order to buy a currency pair. Select currency pairs, assign the appropriate asset type and enter the trade. 
  4. Stay tuned for changes. Players’ positions can change quickly. Close the trade if the trend turns in an unfavourable direction.

Forex Trading Instruments

You can use different instruments to invest in Forex. Here are some popular methods of making money with a brokerage account:

  • Options. They allow buying or selling a currency at a set price on a specific date and time.
  • Futures. They differ from options in that they prescribe the execution of the contract when it expires.
  • Funds. Mutual investment funds (UIFs) and foreign exchange-traded funds (ETFs) often contain stocks and bonds but may include foreign exchange and provide hedging (a combination of trades designed to offset risks).

Beginners can invest in Forex through exchange-traded funds (ETFs). With a currency ETF, you can increase your Forex investment without actually trading yourself. Instead, you buy ETFs in the stock market and add them to the portfolio. Currency ETFs are considered to be riskier than stock and bond ETFs. For novice investors, it makes sense to limit currency ETFs to 10% of the portfolio (more assets = more reward = more risk).

Benefits of Investing in Forex

  1. Affordable earning opportunities. Market participants can develop trading strategies based on international news, political elections and important events.
  2. Round-the-clock trade. Unlike the stock market with fixed hours, the Forex markets are almost always open because they operate in different time zones.
  3. Portfolio asset allocation. Currencies represent an excellent opportunity to diversify your investment portfolio, which traditionally includes assets of the stock and commodity market (stocks, metals). Ideally, Forex should not exceed 20% of the entire investment portfolio. And you will need to recalculate the level of risk in the portfolio if you add currencies to it.

Profitability of Investing in Forex

Your Forex earnings are based on the difference (spread) between the buy and sell prices of a currency pair. Before making a profit, you need to cover the spread. Your profit or loss is anything that exceeds the spread. The reality is that the profit will be small. Even if you break a small spread, the profit can be as little as a few cents at a time. Quotes are calculated to the nearest hundredths of a cent. It is hard to make big profits without trading large amounts.

To Sum up

While Forex trading seems pretty straightforward, it actually takes more knowledge and practice to be successful than a novice investor might expect. Make sure you assess your emotional robustness and financial risk tolerance correctly. Do not speculate with funds that you cannot afford to lose. And think carefully about your long term investment plan before investing money in Forex.

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