If your pension plan is looked ragged, your savings are sitting accumulating next to nothing and your shares portfolio hasn’t produced any kind of yield in years, then you can at least take comfort in the fact that you are not alone. Investing is not as straightforward a concept as it was a generation ago, and it is hardly surprising that amateur and small-time investors are looking at new approaches to investment that previous generations would have thought were only for the experts.
Forex trading is probably the best example. These days, there are numerous trading apps that you can download onto your smartphone and that will let you start trading, without the need for a sharp suit, a sports car or, indeed, a stockbroker. But just because you can, does it mean you should?
It’s a well-known axiom that investments can go down as well as up, and Forex trading is not something to leap into without doing some homework. But similarly, it is something where even a beginner can find success, as long as he or she gets to grips with some simple concepts.
Understand the drivers
Let’s take a step back and look at what you are doing here – Forex trading involves buying and selling currencies, sure, but specifically, you are looking at the behaviour of a specific currency pair – let’s say the Rand and the Dollar. What drives the value of one currency as compared with another?
There are some social and political factors – you only have to look at what happens when the US President decides to order an air strike or when the UK votes to leave the European Union to see that. However, the biggest drivers are the pure economic ones. Always keep abreast of what is happening with the interest rates that are set by the central banks dealing with whichever currencies you are contemplating.
A higher interest rate means a more attractive currency, as it is going to generate a better return. So if a central bank announces an increase in interest rates, or if the financial press is confident that such an announcement is imminent, you can expect the currency to go up in value.
There are other economic drivers, but while these might have some bearing on currency markets, they are more likely to impact that all-important interest rate. They include the following:
Inflation – central banks try to keep inflation at around two percent. If it goes much under or over this, there is a good chance that interest rates will be adjusted accordingly. The metrics are directly proportional, that is to say rising inflation will trigger an increase in interest rates and vice versa.
Spending – this leads us deeper down the rabbit hole, as spending is a factor that influences inflation.
Employment – the level of employment provides clues as to the overall health of the economy. When unemployment starts to rise, that can be an indicator that the economy will start to slow.
PMI – the purchasing manager’s index provides an insiders’ view on how the economy is performing from the perspective of key sectors such as construction, wholesale, manufacturing and so on. A better PMI means a more healthy economy.
Learn how to use the Forex tools and indicators
Understanding what is happening in the wide world gives you great contextual information. However, there are also plenty of things happening within the Forex trading world itself that you need to be able to read and interpret.
Take a look at any online Forex guide and you’ll see what at first looks like a dizzying array of acronyms and indicators that rely on complex statistical analysis. Getting to grips with the most important ones, however, is neither as frightening or time-consuming as you might think. Invest a little effort into learning how to use momentum indicator MT4, for example, and you will gain a valuable insight into how currency pairs behave. This will help you to make better decisions, which is ultimately the key to a better ratio of profitable trades.
Manage volatility smartly
No two currency pairs behave in exactly the same way. Some display significant volatility –GBP/USD is a prime example – while others tend to remain stable, for example EUR/GBP. Investment 101 is to seek a diverse portfolio, so you would do well to factor in volatility as well as socio-economic drivers and those basic technical indicators when preparing your Forex trading strategy.
Get it right and you can leverage the “safe haven” of low volatility while taking advantage of sudden changes in the more volatile pairings. For extra safety in highly volatile conditions, many traders choose to exercise a straddle, whereby they effectively have a hold and put on the same security – if there is a big enough shift in either direction, it means you can come out a winner.