Anyone Can Earn Some Extra Cash By Taking On The Forex Markets
It’s the sort of idea that would have past generations tutting in horror. Surely Forex trading is for those Michael Douglas type characters depicted on the big screen with a “greed is good” attitude – the guys who always fall from grace sooner or later. Our parents and grandparents certainly wouldn’t have thought Forex a viable investment idea for the amateur – not so much ‘Wolf of Wall Street’ as a lamb to the slaughter.
But times have changed. Alternative investments are on everyone’s lips, as much through necessity as anything else. Pension funds are in crisis, savings accounts provide little better yield than hiding your money under the floorboards and even government bonds, the safest investments of them all, started trading in negative territory.
It’s hardly surprising that we are forced to look for alternatives, and if the digital age is good for two things it is these: Providing a wider choice of options than we could ever have thought possible and explaining in simple terms what seemed dark and mysterious.
And so it is that today, there are dozens of online Forex trading platforms and smartphone apps, along with just as many online guides and tutorials telling us how to use them to make a tidy profit.
The real question is where to start – so here, we have distilled the basic principles that will put you on your way to becoming an amateur Forex trader. It won’t make you an overnight millionaire, but this time next month, it could stand you a decent night out if you follow a smart strategy.
1) Understand currency correlation
It’s important to understand that when you start trading, you are thinking about currencies in pairs. It’s not just a case of “buying or selling Euros” for example, but of assessing the behaviour of the Euro against some other currency (most likely GBP or USD).
To get a grip on that, you need to think more deeply than about “how the Euro is doing,” and to really delve into currency correlation. So what does currency correlation mean? Essentially, it compares how those two currencies behave against common external factors. Let’s take that GBP/EUR trade as an example.
When you are trading GBP/EUR what you are really doing on the global scale is trading on the GBP/USD and USD/EUR pairs. Understanding how these two currency pairs correlate with one another gives you a clearer view of the behaviour of the currencies under market forces. The currency correlation is expressed as a factor between +1 and -1, ranging from complete correlation to complete negative correlation.
Having a clear view on the level of correlation helps you to increase the diversity of your portfolio and thereby reduce your exposure to market risk.
2) Trade with the head, not the heart
To get back to those Hollywood movies for a moment, you always know when the smooth wall street tycoon is about to fall from grace because the tie becomes twisted, the perfectly coiffured hair is out of shape and the guy is sweating profusely. Back in the real world, that’s understandable. Some trades will go wrong. But as long as you follow your strategy and prepare for that eventuality, you will have the last laugh.
Key to success in this regard is avoiding that dishevelled hair and sweaty palm moments entirely. Stick to your plan, stay calm and whatever else you do, don’t suddenly start changing your strategy just because something has not gone to plan.
3) Start small and let it grow
There’s a basic axiom in trading that you should only ever trade what you can afford to lose. If that means starting off your trading account with practically nothing, so be it. Start small, follow a clear strategy and you will start to reap rewards. Keep those early gains on your account and you can gradually watch it build up into something tangible.
The other golden rule is to trade a maximum three percent of your account on any one transaction. Now three percent of not very much is even less, but if you treat these early weeks as a learning curve, you literally have nothing to lose and everything to gain.
4) Consider automation
If you’d prefer to take a “set it and forget it” approach, there are automated trading platforms that will do all the thinking for you. All you have to do is programme in your stops, and the software will do the rest. There is certainly something to be said for the strategy, particularly if you are potentially hot-headed enough to do something impulsive. An automated system will guarantee trades based on logic and reason, rather than emotion.
Ultimately, however, leaving it all in the hands of an app deprives you of the opportunity to gather expertise in what was once considered one of finance’s most mysterious arts. And who can resist a chance like that?