Forex Basics In 2020’s Turbulent Investment Climate
With the world in the midst of a widespread financial crisis, many people’s outlook on investment is changing rapidly. We noted in the report ‘Dow-Jones Index Has Lost All Profits Since Trump Election’ that the U.S. markets have plummeted drastically. Alongside the falling numbers, The Washington Post reported on the “fear index” for the same markets spiking — an indication of high volatility, which could further dissuade traders from keeping their money in stocks.
In many cases, these factors mean that people are simply pulling their investments, seeking to protect their assets until such time as the crisis seems likely to pass, and stock markets begin to look more stable. In other cases though, people are going to be looking for alternative ways to invest. And with the forex market typically representing one of the most popular alternatives to everyday stock exchanges, we decided to give it a look, and cover some of the basics.
What is Forex Trading?
Forex trading, or FX trading, is the currency trade. There are actually a few different ways to trade in forex, but by and large, traders are looking to profit off of the day-to-day fluctuations in currency values. In some cases, the means “buying” one currency with another, and selling it back when it’s worth more. In others, it effectively means buying or selling a currency pair, almost as if it’s a stock; for instance, buying USD/EUR means you’re “buying” the U.S. dollar against the Euro, such that if the dollar’s relative value goes up, and then you sell the pair, you profit on the change in value.
That’s not the only way a trade can work, however. FXCM’s guide to forex highlights the opportunities available to traders, and points out something that a lot of people miss: that you can “trade up or down just as easily.” That is to say, you can sell USD/EUR if you expect the dollar’s relative value to fall as well.
Where Can You Trade?
Broadly speaking, most forex trading occurs online these days (or occasionally through apps). There are tons of different brokers that will facilitate forex trades, meaning that much like with stock market investment, your main task is finding one you trust. Generally, there are a few key factors to look out for — such as trading costs, customer service quality, regulation, and the quality of the trading platform. What these factors convey is that you essentially want to pick a broker that takes a low-cost yet professional approach, providing the tools and service you need without unnecessarily high fees.
What Are The Benefits?
As to why people actually trade forex, there are a few commonly cited benefits. One is that this is the definition of a high-liquidity market. This means that a vast number of trades occur each day, and ensures that transactions are completed quickly and as expected. Essentially, that high volume of activity means that trade occurs efficiently, as well as that currency pairs can be bought or sold in large amounts without issue.
Another benefit of the forex market is that it is open 24 hours a day during the week, with people trading in different currencies all around the world (though certain prominent currency pairs are known to be most actively traded during certain hours).
With those benefits mentioned though, it’s also important to note that forex trading is also quite demanding and, like any other form of investment, involves some risk. The benefits are real, but they’re more about market conditions than profit potential.
Does Cryptocurrency Count?
If you read about forex trading and wonder if cryptocurrency counts as part of the broader “currency trade,” you’re probably not alone. Particularly given the current financial crisis, many are giving crypto investment another look. Hackernoon covered “cryptocurrency in the time of crisis” and pointed out that some see it as a way to diversify a portfolio. Others see it independently as a “safe” asset when other markets are crashing. As appealing as cryptocurrency can be on its own though, it is not technically part of the forex market. It can, however, be another intriguing alternative investment to read up on.
Ultimately, it’s a tricky time to invest no matter what market you may be looking into. But with some exploring alternatives to the stock markets, forex may emerge as a popular option. This guide doesn’t tell you everything you know to make a strategic investment, but it can get you started with understanding the basics.
