How to Invest in Currencies?

We’re living in an uncertain economy. Not only it may be harder to earn money, but it’s also harder to keep it due to inflation.

And nobody knows what your money will be worth tomorrow. One thing for sure is that after the pandemic started, people now expect anything to happen. So you can be sure there WILL be economic changes.

Will they be positive or negative?

When you consider your lifetime savings, you’d better not take that risk. And if you don’t want to spend sleepless nights worrying about money, it may be a good idea to invest in other currencies.

It’s a simple way to diversify your assets and potentially multiply your money. Or at least, not to lose it. And if a currency drops in value, you still don’t lose money until you sell that currency.

By not investing in other currencies, you’re choosing to trade a single currency. But if you want more control over your finances, this should be your next step to investing.

How to Invest in Currencies?

How to Invest in Currencies

With so many platforms, it’s dead easy to invest in both foreign and cryptocurrencies. Just pick your favorite currency exchange, and within minutes, you could be trading coins.

However, there are a few hurdles that can stop you from getting the money you earned. Which defeats the purpose of investing. But you can easily avoid these issues if you learn how to invest in currencies the right way.

Open an account

Exchanges make money by brokering trading, which is why they’ve made it easy to sign up. You just register with your personal information, set up some security, and link your payment methods. Ready to buy.

Most people buy via foreign or crypto exchanges. But other alternatives include foreign bonds, exchange-traded funds, and money markets.

Investing is easy. But if you intend to withdraw your funds later (who doesn’t?), that’s harder. And if you don’t plan for this before you deposit, you will lose all your funds.

Pass the verification

The law doesn’t allow investors to trade without verifying their identity (for money laundering and other reasons). However, you can deposit and trade with your money meanwhile.

It’s a common beginner trading mistake. You start trading and maybe make some money. But the exchange doesn’t inform you about KYC procedures until you ask to withdraw. And most information is permanent, so if your data doesn’t match with your legal documents (word by word), you’re out of luck. Maybe you can fix it with customer support if you’re willing to go back and forth for months.

KYC requires:

  • A document ID including your name and number (maybe a selfie holding the card)
  • Proof of address, such as your bank statement or utility bill
  • An agreement filled with your legal name, number, signature, and current date

Do NOT invest anything until you’re 100% verified, or you might lock your funds. After you verify, you’re ready to trade.

Avoid Common Currency Trading Mistakes

Avoid Common Currency Trading Mistakes

You can have a winning strategy and a great history. But in the world of trading, you’re always one step from losing it all, especially when making common mistakes.

These are even more dangerous when you win the trade. Because the fact that you made money makes you think that you did things right. This leads us to our first mistake:

Using unreliable strategies

  • You research a technique but don’t consider the context where it’s applied OR
  • You don’t have enough data to make predictions reliable

Why would you do this? Because the markets encourage and reward those who act fast (at least in the short term). When you think of all the trades you might be missing out on right now, it’s easy to justify buying. You shouldn’t buy when prices go up, but you neither want to face the opportunity cost.

If you trade big numbers with unreliable information, you’re mismanaging risk. First, ask:

  • How many times have I used this strategy and succeeded?
  • Have I used it in as many cases as possible (e.g., market going up, down, or sideways)?
  • What’s the margin of error for my predictions?

Probabilities can lead to the unexpected:

a. Lose three times in a row with a 90% success chance strategy

b. Double your money twice with a 10% success strategy

Winning once isn’t enough to win every time. You need reliable data.

Not including the social factor

Maybe you’ve researched and found some documents about chart analysis. But most beginners prefer to look at prices and decide based on instinct (similar to the lottery). As a result, there are millions of traders who think that can outsmart others, or they ignore that others may think the same.

If you find a winning strategy, that solution may become wrong after enough people use it.

Imagine all you owned all the capital invested in a stock. You’d be competing against yourself and making no more profit. The only way you could win is if more people join the market, so you can sell. But after that, the new adopters would lose.

Since most traders are win-lose scenarios, you should ask yourself: “What do others win when I trade this currency?” Think big: “My strategy is pretty evident. So assuming most people will do this, how does this benefit the other side?”

You improve your odds of winning the moment you (mentally) play on both sides of the fence.

Buying because “it’s dumb not to” (AKA FOMO)

It’s smart to buy because you researched and believe in the currency’s future value. It’s NOT good to buy when it’s going up, you just discovered the currency, and don’t want to miss out.

When more people adopt a currency, it will increase its value. But that doesn’t guarantee it will continue to do so, because the early adopters still want to sell theirs.

The more it grows, the more news you’ll hear encouraging you to buy. What you don’t know is that the guys who promote that are ready to sell their large trades as soon as you buy.

Your disadvantage is, when trading small, you look for higher profit margins, such as 40%. But those who invest millions only need 5% or less to make a ton of money.

So big investors influence the currency’s value the most and don’t need as much margin to profit. This means they’ll almost always sell before you do unless they’re holding for the long term.

Buying to sell

Have you ever sold an investment so early you bought it again? If you buy at $2, sell at $4, and buy at $5, you shouldn’t have sold in the first place.

You can play the day trading game if you’re willing to compete with deep pockets who do it for a living. Otherwise, you’ll run out of money before you get to those “exponential gains.”

Do you buy only because you want to sell it for higher? That might work in business but not as well when investing.

Businesses require capital and research to find those inefficiencies. But when trading, you just need to register into an exchange, find a rising stock, and buy. Everybody can do it.

So what are better reasons to buy?

  • You think more people will adopt the currency because it’s new
  • You believe in the team behind the project (e.g., ETH’s founders, TSLA’s Elon Musk…)
  • Or you can buy “for fun” and not caring of what price it reaches

The next time you buy, remember that many others are doing it. And if that raises prices, more buyers may want to sell.

Trusting your beliefs more than the facts

Beliefs can be dangerous because they look like reality. And the difference between knowing and believing is how well you question yourself and research.

Here are some beliefs that might risk your money:

  • If I bought a stock, many others will do, and its price will increase
  • If a currency becomes 3x more valuable overnight, the growth has just started
  • If it reaches an all-time high or low, it will do it again
  • If you hold for long enough, you will always break even at least
  • A 50% success strategy works once every other time
  • I’ve never traded before and made money in my first purchase. I must be a good investor

All these assumptions are dangerous and can blow your account if you trust all your money. You want to research and correct mistakes. It’s better to be wrong now than finding out after losing.

Since results lead to misleading conclusions, the safest strategy is risk management. If your strategy says to sell, you do it, and the currency grows three-fold in five minutes, you lost a lot of gains. But there’s nothing to regret because you won’t lose long-term.

Using an unreliable pair

The least volatile pairs are AUD/USD, EUR/USD, GBP/USD, USD/JPY, and CAD/CHF. And the most stable currencies are CHF, JPY, NOK, SEK, EUR, SGD, USD, and AUD. Their price doesn’t change as much, which makes them more predictable.

But traders make money from those fluctuations. Why do we want less volatility?

Because each currency has different prices at the same time, depending on the currency you’re using to compare it. The most stable currency keeps the analysis simple.

Let’s say you’re trading GBP/USD and you ignore this issue. If the pair shows that GBP prices rise a lot, it’s second nature to think that GBP has become more valuable. It could also mean that the dollar has fallen. And every other USD pair will seem to grow in value (AKA correlation).

What happens if you don’t consider pair volatility?

Let’s say you compare with USD. If the dollar loses value, your currency will appear with a higher price. But because you withdrew your investment money in USD, you didn’t earn anything from that difference. You have less buying power with a weaker dollar. In the charts, it may seem that you made a profit.

Especially in cryptocurrency, this detail tricks most beginners.

Buying too many currencies

What’s wrong with diversification? Buying more currencies helps you understand how each one performs, and you can always cut the losers later.

Everything you hear is true. Except when you misunderstand diversification.

Diversifying is not just trading another currency pair, but another price pattern (low correlation). For example:

  • BTC and ETH have a 76% correlation coefficient
  • For ETH and LOOM, it’s 45% or less

So the best diversification strategy is to choose your main traded currency and buy others with low correlation.

That doesn’t mean they all share the same price or movement, but the same pattern. For example, it’s also correlated to (shorted) currency prices the contrary to its main (negative correlation).

If the correlation is close to:

  • 0%, you’ll see a different price pattern
  • -100%, prices will rise when your currency’s fall. If you invested 50% on each, you’d earn nothing and spend money on transaction fees
  • 100%, prices will rise and fall whenever the main currency’s do

It also means that prices change at the same time (so there’s no way to profit from correlated stocks). Yet, some currencies will vary more than others.

Note: To protect your investments, it’s worth getting into recession-proof stocks. But the perfect investment for you will depend on your goals.

Managing Risks On Currency Trading

Managing Risks On Currency Trading

Test before you invest real money

Despite all the information out there, you don’t know what to expect from an investment until you experience it yourself. And the best way to build a reliable strategy is to try the most things.

You can know nothing about those currencies and start small just for testing (e.g., $100). You pick a dozen currencies and wait a month. When you come back, try to explain why you made or lost money on each stock.

After you reflect on those results, how confident are you that you can make money with that currency the next month? If you do, it’s time to allocate more. And if you don’t, cut out the losers.

One month is still little time, so do it gradually. And if a currency makes you lose money, lower the allocation to a minimum, so you can still test the next months.

Don’t invest without a strategy. And the amount of money you put down should be proportional to the data collected.

Protect against losses

Here’s a strategy many may have thought: if a trend goes against your predictions, you immediately invert your strategy. If you bought and prices are falling, you could sell and short instead. But these switches will cost you fees.

You can also short and long 50%. But by canceling risk this way, you’re canceling your profits (still paying fees).

There’s a way to cap your downside without losing your upside: options. Here’s how they work:

Imagine you buy €1000 for $1100.

But later, those EUR lose value, and it €1000 is worth $900 now. Had you bought a put option at $1100, you could have still sold €1K for $1.1K.

What if those €1000 are worth $1300 instead? If you bought a call option at $1100, you could still buy €1000 for that lower price.

That’s the good part. Here are the limitations:

  • Options are useless when the planned scenario doesn’t happen. But there are no requirements to execute the contract if it doesn’t benefit you
  • Options cost and upfront fee, depending on your trading volume and contract length (the time you’re allowed to trade for that price)
  • There’s a percentage fee charged when trading with the contract
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