Ways to Profit from Forex and Exchange Rate Investments

With a daily trading volume of 5.5 trillion dollars, it is the world’s largest and rapidly developing foreign exchange market, where countries’ currencies are exchanged with each other. Exchange rate investments play a significant role in this market. There are many geographical trading centers in different parts of the world, so there are many centers where forex orders are processed.

World forex centers in order of importance: London, New York, Tokyo, Singapore, Frankfurt, Zurich and Hong Kong. The main participants of the forex market are commercial banks, central banks, portfolio management firms, insurance companies, large companies, hedging funds, and individual investors. The most important feature of forex transactions is that it is a market where leveraged transactions are carried out. 

A forex investor who uses leverage has the opportunity to make high-volume transactions in the world’s largest markets with his small savings. Thanks to leverage, purchases and sales can be made with a leverage ratio equal to the money . 

The most commonly used currency in forex markets is the US dollar. Terms such as USD (American Dollar), EUR (Euro), and JPY (Japanese Yen) are abbreviated names of the country’s currency. Expressions such as EUR/USD or USD/JPY are the expression of one country’s currency with the currency of another country.

What is currency investment and how is it done?

In Currency Investment, individuals or organizations that aim to make a profit direct their investment to the currency that will provide the highest return. If the interest rate in Europe is higher than in America, the Euro will gain value as the demand for the Euro will increase.

If the interest rate in America is high, the US Dollar will gain value. In addition, the expectation of an interest rate increase will result in the currency of the country that will increase the interest rate gaining value.

If the goods produced by the country with a high inflation rate are more expensive compared to abroad, the demand for imported goods and foreign currency will increase, and the country’s currency will lose value against foreign currencies. In the short term, since the central bank will increase interest rates in the face of the risk of rising inflation, in this case, the country’s currency will gain value.

In order to understand the effect of economic growth, it is important whether the growth is based on consumption or production. Since growth based on consumption will increase imports, the demand for foreign currency will also increase.

As a result, the country’s currency will lose value. If growth based on investment occurs, production in the country will increase and costs will decrease, exports will increase and as a result, the country’s currency will gain value.

How does the currency market work?

The currency market is the exchange place of currencies of countries. In other words, they are markets where the currency of one country is bought or sold in exchange for the currency of another country. Therefore, first of all, currencies should be well-known, analyzed, and especially informed about parties.

The statistics of brokerage firms showing parity rates in graphic form should be followed and the analysis of these graphs should be evaluated well. The most suitable method for investors who are new to the currency market is to gain practice by trading on a trial account.

Demo accounts allow the investor to get to know the platform and the products traded, while also improving their trading skills. When entering the currency market, the amount of collateral deposited into the account and how much of this amount will be used in the transaction are important.

It should be taken into account that the currency market carries high risk and care should be taken that the amount deposited is not an amount that will affect your life. You should be patient when investing. You should try to buy at the points where the parity is at the bottom and sell at the points where it is at the top.

How to make currency rate forecasts?

The most fundamental problem that concerns investors, managers, and market participants is predicting what the future will be in exchange rates. However, it will not be possible to make exchange rate predictions and manage risks without understanding the relationship between exchange rates.

In real life, it is not easy to predict exchange rates, especially in countries that have adopted a floating exchange rate system. Because exchange rates are affected not only by economic factors but also by different factors such as politics and politics.

Factors such as the economic policy followed by the government, the level of uncertainty in the political system, the regulatory policies followed by the Central Bank and/or institutions, and the interventions of the Central Bank in the foreign exchange market fundamentally affect exchange rates.

Political power and stability in a country also positively reflect on the country’s economy. The policies followed by the political power (government) leading to instability, weakness in management, an aggressive attitude towards other countries in foreign policy, and the threat of war will affect exchange rates.

The significant increase in capital movements in recent years has become even more important than foreign trade. With banks opening branches in almost every country and developing technology enabling money transfers to be made quickly, it has become easier for international capital to move quickly to the region where it thinks it will make more profit.

At this point, the term and purpose of the capital gain importance. While capital coming for long-term investment purposes has positive effects on the country’s economy and employment, capital movements aimed at gaining profit from short-term speculative movements leave at the same speed when they provide the expected profit and disrupt foreign exchange balances.

How to manage risk in currency investments?

Making High-Volume Transactions: Leveraged transactions require a different risk perception than spot markets. The leverage between the transaction size and the principal is an element that must be taken into consideration. Taking a position using all or most of the capital in the currency investments market may cause the principal to be lost in a short time.

Not Determining to Take Profit and Stop Loss Levels: One should act within a strategy and have a target price when entering a position. In the event of a risk, the price at which the position will be closed and the amount of loss incurred should be determined with take profit and stop loss orders. Otherwise, losses may occur.

Carrying a Losing Position for a Long Time: If the level at which the losing position will be exited is not determined in advance and if we carry losses for a long time with the expectation that the currency investments market will turn in our favor, the capital may melt to a large extent.

Exiting a Profitable Position in a Short Time: As an investor, the reason for taking on the risk of loss is the expectation of profit and the desire to maximize profits. Otherwise, losses cannot be financed and we see the portfolio shrinking with each passing day. In order to avoid this situation, we should wait as long as possible in profitable positions, move stop-loss orders into profit, and use trailing stop-loss.

Making Emotional Decisions: An investor is expected to make all investment decisions free of emotions. The most difficult part of the job is always making decisions isolated from emotions.

Trading for the sake of doing: Trading in financial markets is a serious business that requires attention. Transactions without seriousness will not provide profit to the investor.

What are the advantages of currency investments?

24/5 trading opportunity: A currency investment market is a market without time constraints. Thanks to currency investments, you can easily perform your transactions in foreign exchange and commodity markets online 24/5 via the Internet.

High Liquidity: The currency investments market, the largest financial market in the world, provides every investor with the opportunity to make real-time transactions of any size they want with its high daily trading volume.

Leverage: The leverage effect is one of the main factors that make Forex attractive. Thanks to leverage, you can make high profits with little capital. The highest leverage ratio determined by the CMB for investors is 1/100.

Due to the high risk of leverage, you can make a profit as well as a loss. Therefore, it will be in your best interest to adjust the leverage ratio of your account according to your expectations.

Double-Way Profit Opportunity: In the currency investments market, you can buy when the price rises and sell when it falls. This transaction is a two-way transaction.

For example, if you think USD/TRY will rise, you can make a profit by buying, and if you think it will fall, you can make a profit by selling. In short, it is possible to make a profit from both the rise and fall in the currency investment market.

Low Buy-Sell Spreads: The buy-and-sell spread in currency investment transactions in brokerage firms is lower than in banks and exchange offices.

See you in the next post,

Anil UZUN