Over the past few years we have talked about different types of investments – from stocks, bonds, mutual funds, real estate, and even foundational principles on entrepreneurship and starting your own business. As much as I am passionate about the stock market, I believe that it is not the best investment nor is it the only investment that will lead you to financial freedom. There are so many other investments out there and your goal as an investor is to study, build the right foundation, and find the best investment that fits you. Take note, the best investment that fits you, not the best investment. Because there is no such thing as the best investment because if there was one, everyone would have invested their money there!
For this post, I am giving you a glimpse of what foreign exchange (forex) trading is. For those who are already invested in the stock market, I believe the principles that I will discuss here would be something easy for you to understand. While for those who are not yet invested, I suggest that you slowly digest the principles that I will talk about.
Basically, what is the foreign exchange market?
If you would compare it with the stock market, the stock market allows investors to buy and sell shares via the stock exchange. Buying shares allows you to be a part owner of the company that you are buying. While in the forex market, you are not buying shares however, what you are doing is you are swapping your currency with another currency with the hopes that as one currency appreciates or depreciates you earn and make money off the difference of the two.
It’s just like you going into the money changer buying USD1,000 for PHP40,000 or USD1 USD = PHP40. After a period of time, you suddenly see the US Dollar appreciate in price, moving from PHP40 to PHP45. What does that mean for you?
Since you are holding USD1,000, you have the option to actually sell your US Dollars and convert it back to Pesos. But because this time your US Dollars have appreciated higher, your USD1,000 is now worth PHP45,000. This gives you a gain of PHP5,000 Pesos or 12.5%. But just like stocks, should it go the other way, meaning the US Dollar goes weaker and drops to 35 Pesos, you lose money.
In a nutshell, that’s how forex trading works. But instead of going into a money changer to swap your money it is done via a centralized exchange which is the foreign exchange market. Since almost everything now is done online, you can do your trading at the comforts of your own home, office, or at the tip of your fingers via your mobile phone or tablet.
What I like about Forex Trading
What I like about the forex market is unlike the stock exchange which gives you hundreds of options of stocks to choose from (PSE), the forex market has just 7 major currency pairs that you need to study. This gives you more time to actually focus and select the right time to come in and out of a position. Also, unlike the stock market which opens around 9:30 AM and closes at 3:30 PM (PSE) the foreign exchange market is open 24 hours a day from Monday to Friday! This gives you the flexibility to actually trade your positions at a time that is more convenient for you! I’ve seen a lot of my financial consulting clients trade the market at 10 PM onwards at a time when they are well rested at home. If that works for them, it may work for you too or you may find a time that suits you!
Also because of its volatility and leverage (leverage simply means that the brokerage firm would lend you an amount that you can use for trading) you have the possibility to earn more, even at a relatively smaller capital. The gains at times are even at a much faster pace than the stock market.
Just to balance things out though, since your investment is leveraged and volatile, you have the ability to win big but also the ability lose big too and it gets amplified more if your position is leveraged. Knowing these risks, the biggest tip that I could give you is for you to study and find ways on how you can manage the risk. You can look at the global cashflow and the economy as a whole along with technical analysis to time your trades. You should not let any of the risks scare you but rather it should encourage you to study and find ways to move around it and earn in spite of the risk.
However, if you think the risk is more than what you can tolerate, that’s the time you step aside, put in less or not even invest at it all.
Lastly, what’s nice about forex trading is the ability to short your investment. To make this concept simpler, this means you can make money if the currency drops and goes the other direction. As a trader and investor, this now gives you two options on how you can make money. Because now you can make money when the market goes up or you can also make money should it go down. You can now make money in both directions of the market. The PSE as of this writing does not have shorting so you can only make money when your stock would appreciate or head up.
Before you invest
Since the returns of forex trading is not guaranteed, I would suggest that you follow proper financial planning principles when you start investing. Here are some:
1. You have to make sure that your emergency fund is intact. Which is six months worth of your monthly expenses for those that are employed and even more than that for those that don’t have fixed income;
2. You are putting money that you would not need for a very long time;
3. If your investment would drop a certain percentage you can still sleep well at night (or your spouse will not get mad at you, whichever comes first);
4. You have covered your bases and that you know the risks and rewards of what you are getting yourself into;
5. You have another source of income that will cover for you basic needs while you are starting;
6. You have a strategy that you will follow so you do not rely on your emotions in buying and selling;
7. You are diversified in other fields of investment.
Getting started in the forex market is also similar to stocks. If in the stock market you would need to open an account with stock brokerage firms, for the forex market you also need to open an account with forex brokers. Make sure you study and research the brokerage firm that you are putting your money into. You should go for the brokerage that you believe in. And along with that the brokerage firm should provide you with security, ease of access along with tools like charts and on time research that will help you to make the right decisions with your investments. As what I always say, in investing, the more information you have, the more holistic and grounded your analysis would be.
As you start investing, I would suggest that you only start with a relatively lower amount but as you get more confident and as you develop the skills needed in forex trading, continue to add to your initial investment until it grows into something that will make your financial goals a reality!
To sum everything up, forex trading is another option for you to diversify your money into something that is fast paced and rewarding but should be tempered with knowledge, research, and high tolerance to volatility. Does this investment fit you? What are you waiting for? It’s time to invest and make your money work hard for you!
I can discuss more about this in future articles about Forex so stay tuned for new blogs. You can also check out HotForex to get started in trading and investing in Forex here http://blog.hotforex.com/?refid=47603.
*pictures via google search