Foreign exchange investment is relatively easy to understand when you first begin to look at it, but seeking some forex training and beginning to trade within the forex (FX) system will open your eyes to a world of complexity.
Buying currencies at a low exchange rate and selling them at a high rate may seem very simple, though there are many strategies you can use to get bigger wins from your currency trades. This article aims to give you some currency trading tips to maximise your returns from your investment.
Currency Trading Strategies
1. Carry Trade
Carry trade is the process of borrowing in a currency that has a very low rate of interest and then investing it into a currency with a high rate of interest. As long as the currency with the high rate of interest does not depreciate more than the currency in which you borrowed, then the investor will earn, at least, the interest differential from this investment.
Over the lifespan of an investment, this can be a very significant earning, but it also comes with risks. Carry trading can endanger the strength of currency positions and can amplify underlying, exchange rate moves.
2. Momentum Trade
Momentum trade is basically the act of trend following and it is a system that has proven successful in many cases. It relies on following patterns of buying currencies that have historically offered high returns and selling currencies that have offered low returns.
Momentum trading can help to perpetuate past exchange rate changes; however, it also puts the investor at risk of a sharp reset in the market. Knowing when to pull out before the momentum runs out is vitally important when engaging in this strategy.
3. Yield Curve Trade
Yield curve trading relies on investments in currencies, depending upon the following of a yield curve. This system relies on indicators that will determine the potential increase or fall of a currency interest value. Yield curve trading is, in many ways, a development of the carry trading system, but it relies far more on anticipating shifts in the market in either direction.
The three strategies listed here are by no means a comprehensive list of the potential currency trading strategies, though they do demonstrate the need for strategy management. When trading with currencies, it is crucial to very carefully monitor the market through the implementation of a strategy, and you will need to make significant efforts to learn to read the signals.
Trading without Risk
There is no way to trade currencies without any risk, but it is possible to limit your risk. By investing only what you can afford to lose and by limiting your desire for returns, you will be able to make the best profits. The biggest losses occur when people get greedy and tired of making small wins. In this case, overinvestment or the failure to pull out in time are the key mistakes that people make.
To trade with a lower risk, it’s important to control your investment, as well as your desires for wealth, because greed is the most likely thing to cause you to lose out on your currency trading investment.