When we previously delved into the world of investment, we defined these various kinds of assets as being in one of three kinds dependent on the risks they carried. In a pretty simplistic way, these consist of low, medium and high risk, and depend on a range of factors which include market volatility and liquidity.
So what are the kind of assets that inhabit the risky side of things? Before the world of cryptocurrency brought high-risk investments to the public, one of the more well-known of these included Forex trading.
But much like horror and base jumping, this kind of investing is not for the faint of heart or garden variety investor; they involve an incredibly attentive approach, strong financial jaw, and a far more internationalised perspective. So with this in mind, what exactly is forex? And why do we need this kind of approach?
Let's dig in.
Forex Trading is basically a kind of shorthand for what is commonly called 'Foreign Exchange' (hence the name) trading, and revolves around the trading of currencies from all over the world, and their associated pairings.
Considering the fact that it is actually one of the more high-risk avenues for investment out there, it's also one of, if not the most liquid markets out there; with more than $5 trillion in trading volume backing it on a daily basis.
With this kind of liquidity, you'd expect it to not have so much volatility, but with so many factors having an influence on the forex market, there's nothing stopping your previous investment into Euros from rising or falling.
If you want the most prominent example of this, then check out the exchange rates of GBP/EUR pairings before June 26th and after. You effectively see this pairing hit a record peak, before plummeting off a proverbial (and financial) cliff.
But that's what makes for part of the value - with such a fast-moving, highly liquid market, if there's a belief that a currency pairing will begin to rally upwards, then you can capitalize one it pretty quickly, and back out before it heads south.
With risk comes greater rewards, after all. The problem is that with so much liquidity, there is an abundance of buyers, meaning that values will change dramatically in a short period of time, with a lot of political developments having an adverse effect on the market. So what does this mean? For one, you need to keep a close watch on the pairings you invested in and be prepared to move positions as the landscape changes.
It sounds like an incredibly ridiculous question to ask when you think about it as an outside observer. But the reality is that it's a much more complicated and challenging market to get involved in, and it all starts with finding, buying and trading your first pairing.
Why is it pairing instead of a single asset? Because you're effectively buying currency at a buy and sell valuation. If, for example, you're buying USD/EUR: you are buying into the first of these currencies, always bear this in mind if you have some strong opinions about the position of one currency against the other.
If we test this out in a scenario: let's say that the GBP is set for a breakout against the EUR; due partly to increases in GDP of the first, and poor economic performance of the second. You can capitalize on this theory by investing in a GBP/EUR pairing at, for example, €1.20/£1.00.
If this comes to fruition, and the pound bounces up to €1.54/£1.00. Depending on how much you invested, you just made a nearly 30% uptick on your initial investment.
Even though special emphasis is placed on short position trading in the world of forex, you can actually choose to invest in some currencies for the long term. Just how exactly you do this is through 'pip' trading.
This refers to purchasing a particular position in forex at a longer pip margin instead of looking at 'shorter' pips. This is a strange kind of vocabulary to just break into, so lets provide some context.
pips refer to the decimal places you're looking to trade at. Short position traders tend to trade a smaller number of pips, that way they can capitalize on quick and drastic changes to the market. Meaning that they'll trade 10-30 pips. Long term traders will look at much longer pip margins ranging from 100-300 in order to ensure a better degree of stability in their investments, while also mitigating potential losses.