To invest in Forex traders must know what the Foreign Exchange Market essentially is.
The Foreign Exchange Market, also known as the Forex market, is the world’s largest financial accounting for more than $4 trillion average on traded value every day. The Foreign Exchange market is comprised of banks, commercial companies, central banks, investment firms, hedge funds, and retail investors, in which the market allows participants to buy, sell, exchange, and speculate on currencies.
Forex is a 24-hour market where currency pairs are traded. An example of a currency pair is the Euro/U.S. Dollar (EUR/USD) pair with the Euro being the base currency and the U.S. Dollar as the quote currency. As currencies are traded in pairs, investors and traders alike are essentially betting on currencies in hopes that it would either go up or go down and result in their favor. Coins are bought and sold according to the current price or exchange rate.
When one would invest money in Forex trading, the goal is to seek more substantial returns over an extended period through buying and holding. On the other hand, traders take advantage of both rising and falling markets to enter and exit positions over a shorter timeframe, taking in smaller and more frequent profits.
But like all investments, when a trader will invest in Forex trading, he will involve himself with the risks alongside it. This is why proper risk management is key to successful trading.
Investment Forex Trading Course
It is most natural to invest money in Forex trading as the market is the most open financial market in the world. Many Forex brokers require an initial amount with the minimum investment in Forex trading being only around $100 while some brokers could go as low as $50.
However, just because a trader could be able to start with only $50 or $100, it doesn’t mean that the trader should start with that initial amount. You may want to consider various scenarios that involve potential risks and rewards of different investment amounts before determining how much to invest money to invest in Forex trading.
Here are some things to consider when you invest money in Forex trading:
• Risk management
As a hard and fast rule, day traders shouldn’t risk more than 1% of their Forex account on a single trade. An example is, if your account has $1,000, it is recommended that the most you’d want to risk on business are $10. Remember that even the most successful of traders have experienced and had gone through a string of losses. The trick is to keep risks on a trade small. This way, a losing streak can’t significantly deplete your capital. Risk is determined by the difference between your entry price and the price at which your stop-loss order goes into effect, multiplied by position size and pip value.
• Pip Values & Trading Lots
The Forex market moves in pips. To get an idea of what a pip is, let’s say in an example that the currency pair Euro/ U.S. Dollar (EUR/USD) is priced at 1.3025. That means that one base currency, or €1 in this case, is worth $1.3025.
For most currency pairs, a pip is 0.0001, an equivalent to 1/100th of a percent. With the example given above, if the EUR/USD price changes to 1.3026, that would be considered as a one pip move. When USD is listed as a quote currency, for example, EUR/USD or AUD/USD, and your account is funded with U.S. Dollars, the value of the pip per type of lot is fixed.
Pip values can vary by price and pair, so knowing the pip value of the pair being traded is critical in determining position size and risk.
• Stop-Loss Orders
When trading in Forex, it’s essential to employ a stop-loss order in case the value of the base currency goes in the opposite direction of your bet. An example of a simple stop-loss order would be ten pips below the exchange rate when you expect the price to rise or ten pips above the exchange rate when you expect the price to fall.
Therefore, there is no recommended initial capital, but do keep in mind that if a trader where to start with $500, it gives him the flexibility in how he can trade compared to a trader starting with only $100. Most traders would say that $5,000 works well as it can help them produce a reasonable amount of income that will compensate for the time spent when they invest in Forex traders.