Moving into forex trading

By Ben Fitzgerald - 12 September 2018

Business

If you have an entrepreneurial spirit, you may well find the idea of forex trading appealing. You’ll be used to making careful decisions, working with numbers and treating money as something that can be put to work rather than just collected or spent.

Depending on the other kinds of business you conduct, you may also find that there’s an overlap of knowledge that you can use to your advantage. You could even use forex to balance out some of the risks you take when you do business day to day. What do you need to know to decide if it’s for you?

What forex involves

The concept of forex trading is simple. In fact, if you’ve ever changed currency when going on holiday, you’ll already have used it. You can make money trading on the forex market in two ways: buying a currency when its value is low and selling it for more when it goes up again, or selling a currency whose value you expect to go down. Success is all about making accurate predictions.

There are three kinds of forex market:

  • The spot market – where the trade is in currency pairs exchanged based on their current market value.
  • The forwards market – where the trade is in contracts that represent agreements to trade particular amounts of given currencies at pre-set times on pre-set dates.
  • The futures market – where the trade is in non-customisable contracts representing agreements to trade particular amounts of given currencies on public commodities markets at pre-set times on pre-set dates.

Most people begin with the spot market, which is by far the largest, but the forwards and futures markets can be useful when you’re using forex to balance other trades.

Understanding leverage and PAMM accounts

Because the money to be made from the difference in currency values in any one trade is small, you will need to have a lot of money to put into trades in order to make a decent profit. Banks and brokers make this possible by providing leverage and making a small profit from your profit. This means that you can use their money to trade with. If you lose too much, however, you will have to clear your debts, so it’s important not to get carried away and think you’re rich just because you’re working with big numbers.

An alternative to leverage is using PAMM accounts. These are pools of money created by groups of investors working together with experienced forex traders making the trades on the group’s behalf. Contributing to a fund like this is a practical way of getting involved in forex even if you don’t have time to make trades yourself.

Building up knowledge

Success in forex trading depends on understanding how currency values are likely to change in relation to one another. This means that you’ll need a sense of what’s happening around the world and how different countries’ fortunes are changing. You’ll need to keep track of armed conflicts, trade wars and political developments as well as less glamorous things like shifts in real estate markets. All this will help you to make more accurate predictions about currency fluctuations. If you run a business that operates internationally and you need this kind of awareness to begin with, you’re in a great position to expand your operations into forex.

Using forex as insurance

When you’re making international trades as part of your regular Swindon business operations, you can use forex to hedge against potential losses. That means that if the foreign currency you’re interacting with moves in the wrong direction for the deal you’re making, your losses will be offset by the gains you make on the forex trade. Naturally, this means that if the foreign currency moves in a positive direction for your deal, you’ll lose on the forex trade, but the stabilising effect can still make this approach worthwhile.

Staying safe

There are scammers out there trying to make money from inexperienced forex trades so it’s important to take extra care while you’re finding your feet. Stick to established brokers with good reputations and remember that if a pitch sounds too good to be true, it probably isn’t true. Even if you decide to pay somebody to trade on your behalf, it’s well worth learning how to trade for yourself so that you understand the processes involved and know what to expect.

Forex trading can be an interesting experience in its own right and a useful adjunct to other forms of trading. It’s a great tool for entrepreneurs to add to their toolkits.

 

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