How to invest in currencies – A Guide for Beginners

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Probably, majority of people in countries with emerging or unstable economies may consider themselves currency investors. Where the national currency tends to fluctuate even people without any trading experience invest in currencies, usually EUR or USD, to protect or increase their savings. But those, who are looking to invest in forex and earn daily or weekly, know that going to banks or currency exchanges is not the cheapest option. Both usually offer very high spreads or charge large commission that eat up most of the profit. In this article you will find an explanation on how to avoid overpaying and invest in foreign currencies without loosing money. Additionally, it will cover top currencies for investing and major factors that influence their market rates.

Ways to invest in currencies

  1. Buy foreign currency at the bank
  2. Advantages Disadvantages
    Accessibility (if you have a bank acount, you know where the nearest bank department is located) High spread or commission
    No special knowledge required  
  3. Buy foreign currency at Currency Exchange
  4. Advantages Disadvantages
    Convenience (currency exchanges can be found at nearly any city in any country) High spread or commission
    No special knowledge required  
  5. Buy foreign currency online
  6. Advantages Disadvantages
    Fastest way to exchange currencies (takes less than 1 minute) Require a brokerage account (takes 10-15 minutes to open)
    Convenience (no need to leave home) Require at least basic knowledge of trading terminal
    Almost zero commission rates (depends on a broker)  

If you are serious about investing in currencies the disadvantages of buying currencies through a broker can be easily overcome. Modern trading terminals are extremely user friendly and you need to figure out how it works only once (if you have never done this before consider starting with a demo account).

Steps to invest in currencies online

  1. Choosing a broker
  2. There are several important factors to consider when choosing a broker. Speed with which trades are executed is one of them (check reviews online and beware of brokers with high slippage). Another major consideration is reliability, to stay on a safe side look for a company with established reputation. Last but not least is commission and spreads comparison – it is important to find a broker who does not become too expensive for you overtime. Compare different trading plans to find one that suits best to your trading style and frequency and offers best spreads on the currency pairs you plan to trade the most. However, remember that quality service and reliability are more important then price.

  3. Opening an account
  4. Most brokers offer a simple procedure for opening an account, but you need to be prepared to submit a copy of ID, passport or driving license and a proof of address (can be a utility bill or an official letter) to verify your identity. This verification is required by law and is only done once either at a time of registering or at a time of making your first withdrawal.

  5. Learning how to trade
  6. MetaTrader 4 remains a most popular and most versatile trading terminal – this is a downloadable software that stores your account information securely on your computer and connects to the internet when it is open. But many brokers also offer their own versions of web terminals for online currency trading, mobile apps or simplified MT4 alternatives. In forex terminology, buying and selling currencies is done through sending BUY or SELL orders. To learn how to send orders and open/close trades, take a tour provided by the broker of your choice.

Best currencies to trade in forex

There are 6 most popular currency pairs on Forex, they are usually called major currency pairs: EUR/USD, USD/CHF, USD/JPY, USD/AUD, EUR/GBP, GBP/USD.

How to invest in USD

World’s reserved currency number one, USD is influenced by many factors hat extend far beyond the United States. However, the key factors that can shake up the US Dollar are decisions of Federal Reserve on monetary policy or even words of the Fed’s chairman and other members of the Federal Open Market Committee (FOMC is the US Central Bank’s department responsible for interest rate and monetary policy in general). If you invest in USD long term, reactions to somebody’s comments may be pretty much ignored, but for a day trader or scalper, the effects of these verbal interventions may lead to significant loss or profit. As in any other country, US economic data releases also have significant influence on the national currency. The most important ones to watch are:

  • GDP (published quarterly)
  • Retail sales (published monthly, helps predict GDP because consumers are the main driver of US economy)
  • Inflation (Fed’s target rate is “around 2%”)
  • Unemployment rate combined with the number of new work spaces created (published on the first Thursday of each month)

However, the USD may also be influenced by news from around the globe, If there is a possibility of a crisis elsewhere, people usually turn to American dollar as one of the options to protect their capital and USD tends to grow in price. On the opposite, if there is an uncertainty within US, for example, the President’s election, then USD may temporary fall in price.

How to invest in EUR

The single European currency is the second most traded one after the US Dollar. It is regulated by the European Central Bank and is sensitive to actions and mood of it’s Governor and his colleagues. Key macroeconomic reports to watch for are:

  • GDP growth
  • Inflation
  • Labor market statistics (unemployment rate, etc)
  • Trade balance
  • Market PMI (indicates the development of business in the region)

On top of the pan-EU reports, statistics from the largest region economies — Germany, France and Italy, has great influence on the single currency and needs to be closely watched by anyone who wants to successfully invest in EUR. Besides, national reports are often published several days before the official EU statistics and may serve as an indication of what news a larger report will bring.

How to invest in CHF

Swiss Frank (CHF) has official status of safe-haven currency along with US Dollar and Japanese yen. This means that people turn to these currencies whenever there is a major uncertainty or a crisis somewhere else in the world. Out of the three safe-havens, CHF is the most stable and less volatile one. Switzerland is known for it’s neutral position in the majority of world’s conflicts, including even the largest ones such as World War II. This country has stable economy, near 0 inflation and low unemployment rate. Although it has also suffered from global financial crises, the negative effect in this Alpine country was less notable then elsewhere. A combination of those factors help Switzerland remain an attractive investment destination for many years. Swiss frank is less sensitive to national statistical reports then any other currency, in most cases economic data but it may be affected by actions of Swiss National Bank (as it happened in 2014 when the regulator unexpectedly dropped a cap on EUR/CHF currency pair and the market went wild).

How to invest in GBP

British pound has fallen significantly during last year and remains under pressure in light of Brexit. The currency is sensitive to political and economical situation in the EU, because even when the United Kingdom leaves the European Union, Europe will remain it’s main market. As for national statistics, UK central bank pays close attention to

  • Unemployment rate
  • Inflation
  • Releases indicating the state of industrial production.

These are the most important reports for GBP investors, but politics and negotiations with Brussels can outweigh any economic report.

Before the referendum EUR/GBP used to be a low volatile relatively predictable currency pair. Some analysts recommended it to novices, but currently there is a lot of tension surrounding British currency, so the EUR/GBP is not the safest option. GBP/USD is an interesting asset, where USA news seem to be the main volatility trigger.

How to invest in JPY

Japanese yen is another famous ‘safe-haven’ currency. Yen tends to rise in price whenever there is a crisis somewhere. First of all it happens because large Institutional Investors from Japan have a lot of money invested in foreign assets. When facing increased risks abroad they opt to sell everything, close all positions and return to local currency. This gives yen a boost that attracts other traders as well. Japan is a developed economy that has suffered from severe deflation over decades. Currently Tokyo is doing everything to keep inflation expectations of consumers higher. Central Bank runs ultra-soft monetary policy supporting the economy with massive stimulus packages, including quantitative easing program and near-zero interest rates. This curse led to significant depreciation of the yen, but the currency managed to keep it’s safe-haven status. For anyone who wants to invest in JPY it is important to keep in mind that yen always moves in the opposite direction from the stock market indices. It happens because weaker yen is beneficial to export businesses.

How to invest in AUD

Australian dollar, also known as ‘aussie’, is an interesting currency to trade. Australian economy relies on export of commodities and agricultural products. AUD can fall or rise significantly following prices of iron ore or gold, as the country is rich in both resources. Commodity prices currently remain low and Australia is still dealing with the mining industry crisis, which led to a significant increase in unemployment rate. Australian Central Bank is known for its numerous attempts to talk down the currency rate on a foreign exchange market, but traders seem to ignore such interventions. Other factors that influence the ‘aussie’ are trade balance reports and industrial production reports from China, because China is the key trading partner of Australia. despite the fact that Australia has a lot of problems to resolve before its economy can fully recover, national currency remains elevated, mainly due to interest of investors from Asia.

If you are looking to invest in forex and earn daily, but are not sure which currency pair is best for novices, consider starting with the currency pairs you know the most about. Based on your location, best currencies to trade in forex could be your local currency versus US Dollar, EUR/USD or any other asset you are familiar with.

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