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How to invest in currencies online to make money from them? Along with investing in securities, investing in gold and valuable works of art, currency trading is the most popular option for alternative wealth enhancement. Investing in currencies, at least at the very beginning, does not require the trader to have specialized knowledge, which also contributes to their popularity.
How to invest in currencies?
When a trader decides to invest in currency pairs, in the simplest terms – he buys one currency and sells another. For example, one of the most popular currency pairs is EUR/USD. The former is the symbol for the euro currency, and the USD symbolizes the US dollar. In the pair shown above, the EUR is called the base currency and the USD is called the quoted currency. The ratio of currencies is one value despite the fact that it refers to 2 currencies. The point is that the trader invests in the EUR/USD pair, not EUR or USD.
How to invest in currencies? Basic returns
Before deciding to trading online, it is a good idea to familiarize yourself with the basic terminology involved in investing:
- Major currency pairs – these are the most frequently invested currency pairs in the world, which are also characterized by the highest volatility,
- Secondary currency pairs – these are less frequently invested pairs. They are not characterized by as much liquidity as major pairs and often feature wider spreads. As a rule, a secondary pair is any pair that is not included in the main currency pairs,
- Exotic currency pairs – when it comes to investing in currencies, this type of currency usually contains the currency of an emerging market country. Their exoticness is not related to the geographic location of the country, but to the difficulty of investing with them. Exotic pairs tend to be illiquid, characterized by wide spreads and fewer market makers. Currency pairs include, for example, the South African rand (ZAR), the Mexican peso (MXN) or the Hong Kong dollar (HKD).
How to invest in currencies to make money?
You can earn money in currency trading by deciding to buy currencies at a certain price, and then sell them when the rate reaches a higher value than the purchase price. Therefore, at the beginning, the trader should determine exactly when a certain currency is cheap and when it is expensive. The best way to do this is by analyzing a chart of the rate of interest to the trader over a period of time, for example, the last year. He should determine the highest and lowest value on the chart, and draw a horizontal line in the middle as a reference for him to evaluate the situation.
Will the price go down or up?
In order for online trading to be effective and profitable, it is also useful to determine the trend. If the trader is interested in short-term investment, he should analyze a shorter period of time, such as a week. On the other hand, if he wants to keep the currency he bought for a longer period of time, he should take a broader perspective, such as a month. Determining the trend, will show the trader what are the trends of the price of a certain currency and whether he can expect it to rise or fall in the coming period.
The results achieved by traders largely depend precisely on the appropriate determination of the price level and the adoption of the right assumption about the direction of the trend of a specific currency. The foreign exchange market is characterized by very high volatility, but apart from exceptional situations, such as the US-China price war, even an inexperienced observer will be able to grasp the premises that can affect the directions of the rates.
How to invest in currencies? Useful tools
Making money on currencies is possible with the help of forex platforms, and these very often come with the necessary analytical tools, such as:
- Average rates,
- Analyses of experts,
- Archived currency quotes.
Technical tools that facilitate currency trading are also a huge advantage:
- Wallets, which allow traders to make free and instant currency exchange transactions,
- Currency calculators that allow convenient calculation of the currency conversion amount,
- Free transfers in most banks,
- Additional discounts that are awarded for referrals to other users.
How to invest in currencies? Practical side
To start investing in currencies, it is necessary to use a good broker operating in the market. You need to set up a brokerage account either by going to its official website or through an application, such as the eToro broker. Then it is necessary to fill in the form with basic data. It is necessary to provide an email address and choose a username and password. The last step is to activate the account using a link that is sent by the broker.
The next step an investor needs to take to start trading online is to make a deposit. It may also be necessary to complete the account with more detailed information, i.e. name, surname and PESEL. Paying the first deposit, will enable you to unlock all the features and possibilities.
Before starting real trading, it is worth spending some time first to test the functionality of a certain broker on a demo account. This allows you to trade currencies without the risk of losing funds.
Investing and trading
Once the trader feels confident, he can start real forex trading. However, this should be preceded by at least several weeks of playing on a demo account.
Types of exchange rate regimes
How to invest in currencies? You should also learn about the 4 main types of exchange rates:
- Liquid – in this case, the exchange rate depends on the development of demand and supply of a particular currency in the market. Usually the rates are free, which means that central banks and governments do not intervene on exchange rate changes. However, there are floating exchange rates where currency interventions sometimes occur. Examples of floating exchange rates include the U.S. dollar and the British pound,
- Indirect – this is the most common type of currency regime, but it is not unicorn. The most popular is the Conventional peg, which is an exchange rate when it is pegged contractually to a basket of currencies or the currency of a trading partner. According to the IMF, it is used by 45 countries, and an example is the Saudi rial,
- Fixed exchange rate, when it comes to investing in currencies, an example of this category would be currency chambers. This is a situation where the exchange rate of a national currency is rigidly pegged to the currency of another country. The central bank of this type of country has limited room to conduct monetary policy. It is only possible to issue money when the level of foreign exchange reserves increases,
- Other, that is, exchange rates that are not classified by the IMF into any of the above groups.
How to invest in currencies? It is worth knowing what affects the exchange rate
As for the liquidity of exchange rates, their value depends on the formation of demand and supply da selected currency. A specific currency is perceived by the market, based on a number of factors:
- Adherence to the market economy – people who are interested in and engaged in online trading are not fond of populist governments. They do not keep an eye on budget deficits and have a negative current account. Sometimes the governments themselves are keen on weakening the national currency in order to make exports more competitive,
- The monetary policy pursued – it can discourage traders from investing in the currencies of countries that do not keep an eye on the level of inflation. Also, the level of interest rates has a very strong impact on exchange rate movements. Raising them encourages traders to buy traders,
- Shaping of commodity prices – this applies to commodity currencies. A change in the price of oil has a very large impact on the behavior of the Russian ruble, and the price of copper on the Chilean peso.
Investing in currencies with the help of a forex broker
Forex is one of the most popular ways to invest in the currency market. An individual investor can invest in currencies with the help of forex brokers. There are different forms of access to this market, depending on the model in which the broker operates. The following models can be distinguished:
- MM, or Market Maker – this is a simulation of the foreign exchange market. The user enters into a transaction with a broker, who takes it to himself or hedges in the interbank market. Then the client does not pay a commission, as it is included in the spread,
- STP, or Straight Trough Processing – in this case, the forex broker is only an intermediary between the user and the foreign exchange market. It sends the customer’s orders to liquidity providers, but does not create a set of offers in one place and earns a commission,
- ECN, or Electronic Communication Network – this intermediary tries to gather as many providers as possible in one place, and allows customers to place orders in a sheet. This reduces slippage. The greater the number of liquidity providers, the lower the spreads,
- MTF, or Multilateral Trading Facility, is a rare model of operation for Forex service providers when it comes to currency trading. In this case, the broker only provides access to a structured order book.
Making money on currencies at online exchange offices
Internet contracts differ little from traditional ones. The former and the latter are regulated by law, and supervised by the Financial Supervisory Commission. They have the same purpose – to exchange currencies. They do not offer any special functionalities. When exchanging money in an online exchange office, an investor can simply do it from anywhere in the world and at any time of the day – all that is required is access to the Internet.
The profitability of investing in currencies at online exchange offices, is regulated by the so-called spread. This is the difference between the rate of buying and selling a currency. In this case, the principle is simple – the lower the spread, the higher the profits. If an investor is interested in earning money on currencies at online exchange offices, all he has to do is open an account at one of them, transfer the funds he wants to allocate to it, and then execute transactions. One should buy currencies when they are cheapest and sell when they are most expensive. Profits from this type of investment, however, will never be spectacular.
Investing in currencies through futures and options contracts
How to invest in currencies? Another way is to trade currencies through futures contracts. One trading venue is Globex, which was created by CME. The value of one EUR/USD contract is 125 thousand euros. Investing in the derivatives market is characterized by the transparency of trading, the operation of a clearing house, and the market calculation of swap points. It is worth knowing that futures contacts expire every month, but trading is unevenly distributed.
Options on futures contracts are also available, with a value of 1 futures contract. However, this is not the most liquid financial instrument. Its advantages include the ability to create many investment strategies that it cannot create with either futures or CFDs.
On the CME exchange it is possible to trade futures contracts not only in currency pairs of the dollar with currencies of developed countries, such as the Canadian dollar, but also developing ones, such as the Indian rupee.
Investing in currencies can also be done through the stock exchange. On the stock exchange, futures contracts are available only for currency pairs. These are small contracts with a value of 1,000 basis units. Contracts for the dollar, Swiss franc, euro and British pound are available on the stock exchange.
Which currencies are worth investing in?
Unfortunately, there is no universal answer to the question of how to invest in currencies and which ones are worth putting your money in. The foreign exchange market is characterized by relatively high risk, and successful investment in currencies requires the ability to predict exchange rates. An important part of trading currencies online is determining and sticking to a pre-determined strategy.
There are ways to protect yourself from excessive loss, such as the stop loss or take profit function. These rely on the ability to close a transaction if the rate exceeds a certain value. In this way, you can either minimize the loss or realize a profit. Investing in currencies is a good way to make high profits in a relatively short time. Unfortunately, it is basically impossible to determine unequivocally which currency is best to invest in.
Is it worth switching from zlotys to dollars and other major currencies?
Foreign major currencies include the most popular monetary signs, such as the euro, the US dollar and the Swiss franc. It is these currencies that are most likely to be exchanged at a bank or exchange office. Which are the best to invest in?
Usually the first choice of beginners is the U.S. dollar, since the United States is associated with a country of wealth and splendor. When it comes to investing in currencies, the dollar may be encouraged by the fact that it dominates the world market and is stable enough in the long term. Nevertheless, the trader himself should keep checking the rates, and for this purpose the use of currency swaps is useful.
The euro is also worth considering – especially in the context of the calm situation for the EUR/PLN pair. The Swiss franc is also worth considering, as it is one of the currencies that belong to the safe-haven category. However, do not expect a large strengthening against the zloty. In the case of the GBP, the Swiss franc scored a big drop not so long ago, and currently only minimal increases are expected.
Is it profitable to buy secondary currencies?
Secondary currencies are less popular currencies, such as the Norwegian krone. They too can be a good option to multiply capital when it comes to investing in currencies. In the case of Norwegian kroner, the investor is dealing with a very stable and liquid currency system, if only before the sale of oil. Investing in the Hong Kong dollar, as well as the Swedish krona, can also be a good choice.
Risks of investing in exotic currencies
There are many different currencies in the world, for which exotic currencies, such as the South African rand, are also included. Investing in currencies of this type is a sure alternative to traditional currency pairs. For novice investors, however, earning money on exotic currencies is not recommended. Politically unstable countries can have a direct impact on the highly noticeable fluctuations of the currency in a specific area.
Read also: CDFs
Therefore, although, on the one hand, the value of the currency spread is often much higher compared to other pairs, multiplying funds in this way, however, requires a lot of knowledge, not only in the field of economics. In addition, in this case it is harder to control the market situation in detail, which increases the risk of making unsuccessful transactions.
Strategy for investing in currencies
When investing in the stock market, success depends primarily on the investment strategy. In short, it is necessary to buy and sell at the right time. The most common currency strategies used by investors, for example, are carry trade. This method is to borrow money in countries with low interest rates and cheap credit. To invest capital in instruments that are denominated in the currencies of countries with high interest rates. However, you need to watch out for inflation. If, when investing in a country with high interest rates, inflation turns out to be much higher than in the country where the trader borrowed, his profit may turn out to be apparent.
How to invest in the stock market? Useful tips
Investing in the stock market involves investment risks, and this should absolutely be accepted. However, there are ways to reduce them. What should you keep in mind when investing in the stock market?
Choosing an investment strategy
Without any plan, you should not start investing. The right investment strategy, and sticking to it consistently, is very important in successful investing. It is also important to choose an investment style, and the most popular ones are swing trading and day trading.
When it comes to day trading forex trading, in this case the trader opens and closes at least several positions in a single day. This style is usually chosen by people who intend to make a living from investing, as it requires the dedication of a considerable amount of time and commitment. Daily opening and closing of positions also involves constant control of positions and anticipation of behavior, so it also requires a lot of stress resistance. Day trading is a short-term strategy.
Swing trading, on the other hand, is a long-term trading style that involves opening positions and holding for several weeks or months before closing, or even years. It is a good choice for people for whom forex trading is a hobby, not a main source of income. This style does not require the trader to devote a lot of time – it is enough to look at the investment portfolio once in a while.
Choosing an investment platform
A forex platform is used by a trader to make trades. Therefore, it is necessary to choose one that will help in investing. You should pay attention to its functionality and what analytical tools it offers. In addition, it should be reliable and work flawlessly. After all, every second counts in trading and a trading platform should not delay a trader’s movements. It would also be good for it to have a user-friendly interface and be easy to use, which is important especially for beginners (read also: Forex for beginners). The number of available markets also matters, and it’s worth checking them out in advance.
Diversification of the portfolio
This is one of the most important rules, related to investing. Diversification consists in the fact that the investor does not invest his entire capital in one financial instrument or one company or currency, but at least several different assets. This ensures that in the event of a decline in the value of one of them, the investor will not lose all his funds, as the other assets can make up for the loss of one.
Do not throw yourself into the deep end. Before a trader starts investing in the stock market, he should prepare well for this, including in practical terms. The best place for this is precisely a demo account. Most brokers provide it free of charge, in users can use it for any period of time.
This allows the trader to check all the features of the forex platform and his skills and determine whether forex trading is an activity that suits him (read also: Online investment platform and Trading platform). In addition, the trader can also try out investment strategies before using them in practice on the real stock market. All this without any risk associated with losing money.
Continuous expansion of knowledge
Investing in the stock market is associated with continuous learning. For this reason, a trader even before starting to invest, should acquire basic theoretical knowledge, and with trading constantly expand it. It is worth using not only books and articles from the Internet, but also webinars and training courses. In order to be a successful trader, it is necessary to constantly learn, which is worth being aware of even before you start investing.
Investing your financial surplus
You should always invest as much as you can lose. It is not advisable to allocate money to forex investing that is not surplus money, because the moment it is lost, the investor may even go into debt in extreme cases.
Investing in what you know
It is worthwhile to use the method of small steps. Do not invest in assets about which you have no idea. It’s best to start with instruments on which you have at least basic knowledge. Only as your knowledge increases should you decide on other assets, for more advanced investors. In addition, at the very beginning it is best to focus on the protection of the capital itself, and only later to begin activities aimed at multiplying it.
How to invest in currencies? It is not a difficult activity, or one that requires specialized knowledge. All you need to do is learn a few basic concepts and set up an account with the broker of your choice, and with the help of the forex platform you can make transactions and use the tools and assistance available.