Admittedly, currency speculation is not easy because it requires a lot of analysis and experience. Of course, the gains can be colossal, but it should also be noted that the losses can be even greater. This is why it is important to understand how speculation works in order to better understand its benefits but also its underlying risks before venturing into it.
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How to speculate in the foreign exchange market?
The Foreign Exchange or Forex is one of the largest financial markets. Every day, up to a hundred billion dollars are traded on this market.
In addition to buying and selling stocks, you can also trade currencies against currencies, in other words, speculate on currencies.
For traders who want to start speculating in currencies, it is essential to be familiar with the symbols of these currencies and the different types of speculation possible on the Forex.
Several currencies are manipulated in Forex, they always appear in pairs. For example, you can have the GBP/USD, EUR/USD or CHF/USD pairs.
In these currency pairs as shown, the first currency is called the base currency and the second, the quote currency. In the EUR/USD pair, the Euro is the base currency and the Dollar is the quote currency. There is a correlation between the currencies that make up the pair.
Thus, the rise or fall in the value of the Euro affects the Dollar and vice versa. The trader’s objective is to anticipate the various price fluctuations of the currencies he is speculating on in order to make a profit. In Forex, one can speculate on the rise or the fall.
Upward speculation consists of anticipating the rise in value of a given currency at a given time based on a fundamental and technical analysis of the market.
To do this, the speculator buys the currency in order to resell it when the rise is effective, i.e. when the currency has increased in value.
Also, as soon as the speculator believes that the upward momentum is coming to an end, he immediately sells the previously purchased currency.
Downside speculation is the process of predicting a decline in the value or price of a particular currency. In this case, the trader can make short sales.
Short selling in Forex means selling a currency that you don’t even have or haven’t previously purchased. Due to the volatility of the foreign exchange market and the leverage involved, traders generally engage in day trading.
This involves buying currencies and selling them in the same day. This practice has a double advantage:
- the transactions are short,
- the gains are large.
Currency speculation: the positive points
Currency speculation is attracting more and more financial operators. Indeed, it has several very interesting positive points for Forex traders.
Forex: a continuous market
Forex has the advantage of being an always-on market. Indeed, Forex is open 24 hours a day, 5 days a week.
You can trade at any time of the day. Thus, workers can trade Forex in the evening after work to try to increase their income.
Possibility of gains on both the upside and the downside
Unlike other markets, in Forex you can make a profit on both the upside and the downside. As we have seen above, by speculating either on the upside or the downside, one can make gains.
Leverage allows investors with small amounts of capital to speculate on currencies.
This way, in case they make bad speculations, they will not lose more than the capital invested. It is therefore impossible to have negative balances with leverage.
Criticism of speculation
If we are unanimous that a good anticipation of market trends is one of the guarantees of success in Forex, we must recognize that anticipation is very complex.
Indeed, there are more than 370,000 formulas to master in order to efficiently anticipate currency rates. Thus, the risks of loss are not to be neglected.
In addition, critics of speculation believe that individual investors, especially hedge funds, distort market data by indirectly influencing currency prices.
In any case, we can remember that despite its underlying risks, speculation on currencies remains an attractive activity in terms of gains.
Going through a demo account beforehand would be an indispensable springboard to develop experiences.