Since the beginning of 2022, volatility has risen at a steady rate. Look no further than the benchmark CBOE Volatility Index (VIX) to see that 2022 stands to be one of the most volatile years in the past decade.
Why Do People Trade FOREX?
People trade currencies for many reasons. By operating in other countries, companies expose themselves to foreign exchange (FOREX) risk because when the value of a currency fluctuates, companies can lose money buying inputs or selling products.
Companies doing foreign business often hedge against losing money from currency fluctuations through currency forwards and futures. If the currency moves the wrong way, negatively impacting their income from operations, they can redeem these hedges to offset losses.
But while this type of forex hedging is crucial to the efficient operation of international markets, it’s not what often comes to mind when someone mentions forex trading. Instead, most people think of the “spot” forex market, which is forex trading in real-time.
Spot traders help keep forex liquid. The more buyers and sellers there are for any asset, including FX, the more likely it will be priced according to its actual value. Forex trading keeps international financial markets operating efficiently.
You can learn more here to benefit from Forex trading in the currently highly volatile markets.
How Exactly do People Trade Forex?
A Forex trade consists of a currency pair that represents a base and a quote currency on the spot market. EUR/USD (sometimes stylized as EURUSD) is a currency pair where the Euro is the base currency, and the U.S. Dollar is the quote currency.
The number of a given currency pair shows investors how much of the second (quote) currency that one of the first (base) currency is worth.
For example, EUR/USD=1.10 means that traders can exchange 1 Euro for $1.10. In other words, the Euro is stronger than the Dollar.
But if a trader thinks that it will change over time and the Dollar will become stronger than the Euro,the trader can make a bet on that by selling Euros and buying dollars. In the future, imagine that EUR/USD now equals 1.05. The trader can now sell dollars and buy more Euros than he sold.
Here is an illustration of how this works:
- Exchange 10,000 Euroto get $11,000 (EUR/USD=1.10)
- Exchange $11,000 to get 10,476.19 Euro (EUR/USD=1.05)
- A trader has profited 476.19 Euro by correctly predicting the currency pair direction. If the trader were to have predicted the price direction incorrectly then the trader would have suffered a loss.
Using an online FX broker, traders can buy and sell at any time. Forex trading markets are open 24 hours, 7 days per week. The broker will update the value of the traders FOREX as it changes, enabling traders to keep track of their profits without doing the math.
Is Now a Good Time to Trade Forex?
Forex trading benefits from volatility. So, the higher the CBOE VIX figure is, the more potential profit traders can make from Forex trading.
Day, swing, and long-term Forex trades can all benefit from higher volatility, both within a specific currency pair and with the greater market itself. Volatility increases the minimum and maximum currency values, and it is within these price swings you can profit when trading Forex.
Diversifying Your Forex Trades
Of course, while profits are potentially higher under conditions of greater volatility, so are potential losses.
As with any portfolio of financial assets, a trader can reduce their risk exposure by diversifying their FX trades. A trader can diversify their Forex holdings by ensuring they include currency pairs in their portfolio that are not all positively correlated with each other.
Sufficient diversification means that at least some of the traders pairs are negatively correlated. This protects the traders risk exposure by ensuring that when they incur losses in one part of their portfolio, another will make gains.
Of course, there’s also nothing wrong with Forex trading for speculation, so long as a trader doesn’t throw all their eggs into that one proverbial basket.
Now is a GREAT Time to Trade Forex
Too often, in periods of instability and down markets, investors flee to their dens, waiting for the markets to recover. But they are missing out on trading opportunities, which exist even during market corrections and periods of high volatility.
Disclaimer: The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.