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3 Things to Consider Before You Decide to Invest in Forex

calculator-385506_640While the average daily trading volumes are always likely to fluctuate in any market, those in the foreign exchange remain relatively consistent. This market is also home to the highest level of daily trading activity, with an estimated $5 trillion exchanged over the course of a typical, 24-hour period. With daily trading volumes reaching regular peaks of $5.29 trillion, the forex market has certainly earned its reputation as the single most liquid and popular investment vehicle across the globe.

Although it is understandable that this margin-based, derivative market should attract millions of traders from all over the world, there is a pressing need for caution among beginner investors. After all, the forex market is also extremely volatile and vulnerable to economic and political trends, while its margin-based nature can trigger losses far in excess of what you originally invested. Success in this market demands considerable knowledge of currency and the underlying laws that govern change, while you will also need to understand the attributes that separate accomplished traders from average ones if you hope to forge a profitable or professional career.

What is the Forex Market and what distinguishes it from other investment vehicles?

This process should begin with developing an innate understanding of the forex market. The best way to achieve this is to first appraise the market in detail, and consider what sets it apart from alternative (and less volatile) trading options such as dividend investments, stocks and commodities. Currencies tend to be traded in pairs, for example, where investors buy or sell a chosen option in exchange for another. There are also a number of diverse ways in which you can invest in the forex market, including spread betting where traders speculate on the performance of one currency in comparison with another.

In this instance, currencies are often traded as derivative products where the investor is relieved from the burden of ownership. This offers them greater scope for success regardless of the state of the market or the prevailing economic climate, as traders speculate on currency trends by buying long or selling short. In simple terms, traders go long by purchasing a currency in the hope that the price will rise over time, while they go short by selling the base currency in a particular pair while investing in a second.

In the case of the former, traders are speculating that the market price will increase. In terms of the latter, however, they are backing a short-term market decline and hoping to profit from this accordingly. This opportunity is extremely appealing to investors, as it means that they can generate returns even as the market depreciates. When you consider this alongside the liquidity that exists within the market and the margin-based returns available, it is no surprise that experienced traders favor currency over other derivatives and products.

What are the Demands of Forex Trading and the key Attributes Required?

Once you understand the mechanisms and opportunities in the forex market, the next step is to understand the practicalities of trading. The forex market is open for 24-hours each day and for six days in the week, for example, with three separate trading sessions taking place consecutively around the world. This underlines the need to select currencies that suit your own trading hours and schedule, while it also highlights the challenges facing those who want to make a profession out of investing in international currencies.

We have already touched on the volatile nature of the forex market, which remains extremely sensitive to geo-political trends, economic sentiment and international data releases. The state of local and global economies has a direct impact on the value of specific currencies, meaning that traders must have their finger on the pulse of international news if they are to execute their orders efficiently. This is why comprehensive, online brokerage firms such as ETX Capital have become so popular in the modern age, as they provide traders with real-time and mobile accounts, in-depth news resources and live analysis from industry experts.

While the complexity of the market and its volatile nature place huge demands on traders, there are also a number of underlying laws that govern change. Positive data releases in major economies such as U.S or Asia-Pacific nations will always create greater sentiment in the market, for example, while geo-political conflicts including influential nations such as Russia will have the reverse effect and cause depreciation in prices. Understanding these rules and having the ability to forecast specific trends will therefore be pivotal if you are to succeed over time.

In this regard, intuition and an aptitude for learning are crucial attributes of all successful traders in the forex market. Critical and strategic thinking is also a beneficial character trait, as this enables traders to invest without emotion and make clear decisions with regards to individual currency pairs and orders. Traders must also be flexible with regards to their applied strategies, as this makes it far easier for them to adjust successfully to sudden market shifts and price movements.

Is the life of a Trader right for you?

With these points in mind, you should have enough insight and information to make a decision regarding your professional future. While the life of a professional forex trader can certainly be lucrative and financially rewarding, for example, it also places huge demands on individuals and requires them to develop a huge knowledge base before they make their first investment.

Above all else, forex traders require at least one of the attributes mentioned above if they are to succeed. Traders who are overly emotional or impulsive are unlikely to succeed in such a volatile and changeable marketplace, for example, while those who lack an analytical brain will also struggle to decipher crucial technical analysis.

In this respect, choosing to become a forex trader is akin to the actual process of investing in currencies. After all, while you must trust your instinct and knowledge to some degree, a great deal of thought and knowledge is also required to make the right decision.

 

Have you ever thought about investing in forex?

 

Photo courtesy of: stevepb

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Kayla is a mid-20s single girl living in the Midwest, USA. She is focused on paying off her consumer and student loans, while simplifying her life and closet. You can join her on her journey at ShoeaholicNoMore or follow her on Twitter.

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