Investing in currencies: What you should know?

The currencies market is the most ‘liquid’ and therefore least volatile, and that makes these markets appealing to many investors. While it can be hard to make huge profits by trading currency pairs without leveraging (more on this below), they are a good way to diversify an investment portfolio.

The reason currency pairings – with the most popular being the European euro and the US dollar (EUR/USD) – are ‘liquid’ is in part because traders include governments and central as well as commercial banks, and also thanks to the enormous volumes traded, which makes them unsusceptible to market manipulation.

The fundamental factors – such as the performance of the economy, labour participation, interest rates, etc – are generally open and clear to everyone, and can have a very large influence. Therefore, currencies create some excellent investing opportunities.

Other benefits include that these markets trade 24 hours a day on every business day, and they have very narrow spreads. Additionally, the foreign exchange markets are very cyclical. The trends can last for a very long time – anywhere from a month to a couple of years, or even decades. These ranges give investors a good idea about what point to buy and sell.

Whereas traders might wish to buy stocks at a low price and hold for a long time, when dealing with currencies the trading is much more active and alive. That is why it is important to rely on familiar price ranges and trends, which can go either up or down. The best traders do not simply wait for the price to increase, but employ different types of technical and fundamental analysis to determine where the familiar value range is.

When trading currencies investors may wish to use more funds than they have, in order to give them the opportunity to make more profit. This is called leveraging. A broker would lend a trader a sum of money at a fixed ratio (ranging between 1:2 and 1:400). It is important to keep in mind that losses are also leveraged.

Given the frequent fluctuations in the markets, currencies can be great instruments to ‘short’, too; by short selling, money will be made when there is a fall in market price.