Building wealth effectively requires diverse investments that are aligned to a single goal. Widening your portfolio means you can limit the impact of a downturn in one area.
Stocks, bonds and real estate are some of the most traditional investment tools, but we’ll explore how you can incorporate forex trading into your approach to financial growth.
Understanding Forex Trading as an Investment Strategy
In simple terms, forex trading involves buying and selling currencies to make a profit. It’s a huge market, with $7.5 trillion being exchanged on a daily basis. This volume of activity means there’s plenty of opportunity for you.
Currencies are traded in pairs on the forex market. If you think one is going to rise in value relative to the other, you use the one you expect to weaken to purchase the other. Should the market go the way you expect, you’ll get more than your original investment back when you sell the currency pair.
Many forex brokers allow you to complete trades on leverage. This gives you greater exposure to the market than your initial deposit would typically allow. For example, if you had £1,000 to invest and the leverage offered was 50:1, you’d be able to borrow from the broker and have £50,000 to utilise instead. This can amplify the profits you can make, but you’ll be liable for the full position size if the market moves against you.
Developing a Forex Trading Plan
Before you invest anything, it’s a good idea to set yourself clear objectives for what you want to achieve. This can be based on individual trades as well as an overall goal. Using limit orders can enable you to buy or sell pairs at particular prices, capping potential losses to a point you’re comfortable with and stopping you from missing out on your desired amount of profit.
You’ll need to conduct some technical and fundamental analysis too. Technical analysis involves looking at historic price movements to help inform future decisions, while fundamental analysis is about understanding the real-world situation i.e. the economic and political climate in the countries/regions using your chosen currencies.
Integrating Forex Trading into Personal Finance Goals
Of course, your forex trading plan will be influenced by your personal financial goals and should be geared towards how you can best achieve them.
You might be hoping to grow a bigger pot for your retirement rather than relying solely on a pension. Perhaps you just want to diversify your portfolio further or hedge against any longer-term investments. Some of the gains you make can be moved across to support these so you can draw on the liquidity at a later point.
Risk Management Strategies for Forex Traders
Together with using stop-loss orders to avoid losing more than you’re comfortable with, you can diversify your currency exposure to reduce the impact a shock in one pair has on you.
Be sure to use leverage responsibly and only stake what you feel comfortable with.
