Trading and investing in the Forex market: key differences and best instruments
Activities in the Forex market are conditionally divided into two major types: active trading and investing. They differ, as a rule, in the number of transactions per unit of time, but it happens that the difference is also in the amount of risk. Active Forex trading is speculation in which a relatively large number of transactions are made per short unit of time, creating the strategies like scalping. Traders usually see income right here and now by opening and closing positions, and it is not limited to a certain amount, depending on the tactics and the chosen instruments.
At the same time, investing is a way to potentially earn in the long run through buy-and-hold strategies. Also, an investor can count not only on the difference in price between the purchase and sale of securities and other assets but also on the dividends they bring.
In general, market participants can use investing in stable assets to diversify risks, and earn on active trading in liquid financial instruments.
How to choose instruments for trading in the Forex market?
First, when choosing assets, it is important to understand where the main pricing occurs. For example, if these are US stocks, then the main pricing place is the NYSE, NASDAQ, and NYSE MKT/Arca (AMEX) trading floors. This means that when trading US stocks, first of all, you should track information from these exchanges, sometimes looking at world stock indices, such as S&P.
If we take oil and gold trading, then the places of the main pricing are the USA exchanges, Europe, and Asia. This means that when trading such commodities, it is imperative to monitor information from, for example, futures world exchanges.
Secondly, the asset should be selected according to the level of liquidity and the traded timeframe. The relationship between liquidity and timeframe is as follows: the smaller the timeframe, the higher the asset’s liquidity should be, and vice versa. In other words, if we trade daily timeframes, then we can afford to trade low-liquid assets, which is in no way suitable for minute timeframes, as this can lead to some losses. To assess the liquidity of an asset, you can use the following indicators: spread, trading volume, and number of transactions.
Third, asset selection is based on available capital. For example, if you have $3000, then it would be unreasonable to buy a single stock worth three thousand: better to use the portfolio approach. A speculative portfolio should contain at least 3 assets (preferably 5) where diversification can work in favor of the trader.
Also in speculative short-term trading, high volatility is an important point, which is an advantage if you need to trade frequently to get a multiple price difference in a short period of time.
The best instruments for active Forex trading
For active trading and making deals, the best instruments are characterized by high liquidity, volatility, small initial capital, and the possibility of using leverage. Multiple Forex brokers offer a wide range of assets, but let’s see which instruments meet the above criteria and are considered the best for trading:
Currency pairs for Forex trading
The currency markets operate 24 hours a day, 7 days a week, and are therefore ideal for a trading day. Forex offers high volatility, great liquidity, low capital requirements, and low transaction costs. When choosing currency pairs, beginners should be careful with exotic currencies as they lack liquidity, although they can be quite volatile.
Stocks for Forex trading
Stocks of different companies turn around on the stock exchange constantly, they change their price depending on the perfomance of the issuing company and market conditions, and sometimes they also bring dividends. Here you can earn both on classic speculation (buy cheaper, sell more expensive), and on medium and long-term investments, namely, buy-and-hold, receiving dividends and price differences due to the growth in the value of the stock.
Index futures for Forex trading
One of the most high-volume trading instruments is futures on popular stock indices. Index futures are highly liquid instruments with low transaction costs, but they are less volatile. Market participants can trade them on the stock exchange, and use the leverage from a Forex broker.
Volatile stock futures for Forex trading
Like index futures, highly volatile stock futures are a popular instrument among day traders. Beginners should be careful when choosing this kind of asset because such stocks are usually not classified as “blue chips”, but most belong to the so-called “third tier” which can fluctuate quite a lot in prices.
Commodity futures for Forex trading
Futures on highly liquid commodities such as oil or gold are suitable instruments for intraday trading. They are bought and sold both on specialized commodities and regular stock exchanges. Like most other futures market instruments, they are subject to Forex broker leverage, which means that traders can enter the market with relatively small capital and earn more than they expected.
Options on indices and volatile stocks for Forex trading
Options offer an inexpensive alternative to expensive stocks. Carefully selected options or combinations of options on well-known indices and popular stocks with a relatively high degree of volatility are suitable instruments to trade due to their high liquidity, volatility, and low trading capital requirements.
Cryptocurrency for Forex trading
This financial instrument, which has recently become very popular, has a sufficient level of liquidity, here we are mainly talking about coins such as Bitcoin, Ethereum, Zcash, and others that are common and well-known to the masses. The rapid jumps in the rate of the same Bitcoin can play into the traders’ hands as for several years its change was not even thousands, but tens of thousands of percent. Market participants can trade on special brokerage platforms, and not only Cryptocurrencies themselves, but also Crypto derivatives, which will help you earn not only on bullish but also on bearish markets.
CFD for Forex trading
This derivative financial instrument allows the trader to make a deal both on the increase and decrease in the price of the underlying asset. Contracts for Difference (CFD) has become attractive, especially for short-term trading (Scalping, Day trading), because it allows market participants to alternately open Buy and Sell orders several times a day. This derivative gives an opportunity to work with leverage and use Cryptocurrency, futures, currencies, commodities, etc. as the underlying asset.
How to choose the best assets for investment?
For medium-term and long-term investments, it is necessary to take into account slightly different properties of assets and instruments than with active trading. Consider some of the factors that investors rely on:
- Focus on value growth or regular returns
If a trader invests in assets so that they grow in value over time, then stocks are suitable for this task. And if a market participant wants the money invested in stock market instruments to bring regular passive income, instruments are suitable for this, which, regardless of whether their quotes grow or fall, provide a cash flow for the funds invested in them, for example, these are bonds.
- Long-term investments without withdrawal
If an investor knows that he will not need capital in the next 3-5 years, then it is better to choose instruments whose quotes, although they depend on price fluctuations in the market, have enough time to maneuver, to take into account all market fluctuations and reflect them in the investment strategy. More often than not, those are stocks.
In the case when an investor assumes that it will be necessary to convert an asset into money within 1-2 years, but doesn’t know when exactly, one should choose instruments that do not depend on market fluctuations or are minimally associated with them such as bonds.
- Volatility as a measure of risk perception
Some market participants, especially when investing for a long time, normally perceive the volatility of the value of assets, while others panic when an increase or decrease does not work in their favor. When choosing financial instruments in a portfolio, you need to understand well what your preferences are regarding their volatility.
The best instruments for investing in the Forex market
Along with active trading in Forex, you can earn by investing, that is, buying and holding an asset for the medium and long term, and then selling it higher or, in some cases, receiving dividends. This type of activity in the financial markets can bring passive income but for a longer period of time: if a trader sees income here and now, then an investor needs to wait until the asset grows. In any case, investing can be used as part of your trading strategy to diversify your portfolio. Consider which instruments are suitable for investing:
Stocks for investing in the Forex market
The most popular type of financial instrument for investment is a stock, which is a security that gives its owner the right to receive part of the return of a joint-stock company in the form of dividends, to participate in the management of a joint-stock company, as well as to part of the property remaining after its liquidation.
If you invest in first-tier stocks, they will be a stable and reliable asset in your portfolio, designed to make a deal in the medium and long term.
Bonds as FX investment
Among more conservative investors, there are quite popular bonds, which are debt securities, the owners of which have the right to receive from the issuer its face value and interest (coupons). By purchasing bonds, you, in fact, lend to the issuer, and he pays you interest for it.
The owner of this security receives income from bonds in the form of coupon payments and/or the difference between the purchase and sale prices.
The bond has another important parameter: the accumulated coupon income (ACI), which is calculated as a percentage of the face value of the bond and will be paid to the owner, even if he sells it before the coupon payment date.
ETFs for FX investing
Exchange-traded funds/ETFs are used to diversify and mitigate risks. These funds follow the strategy outlined in the prospectus and are generally classified into bond funds, equity funds, and commodity funds.
A distinctive feature and the main advantage of these instruments is diversification: by buying shares of such a fund, you can invest in shares of more than 100 companies at the same time. Besides, there is also a low entry threshold.
Precious metals as FX investment assets
Precious metals include gold, silver, platinum, and palladium, and the most popular and easiest way to buy these precious metals is to purchase an ETF for the metal you want. It is also possible to buy stocks of mining companies on the stock exchange, which will no longer be a direct investment in the precious metal, but in a business that depends on the value of this asset. Alternative and more expensive ways to invest in precious metals are bars and coins.
Investing in this type of instrument is your portfolio insurance, and given the increase in the money supply, it is also protection against inflation.
Advantages of trading in the Forex market
Forex trading has many advantages for market participants: minimum starting amounts, the ability to use leverage to increase potential returns, as well as instruments with which the trader does not need to deliver or receive physical goods. Many market participants prefer trading as an active way of earning money, while they use investing for risk insurance and portfolio diversification. In general, it depends on your trading strategy, but you can be not a pure trader and investor, but effectively combine both.
Social and Copy trading tools in the Forex market
Forex trading may seem complicated and energy-intensive for beginner traders, so in order to save time, understand how the market works and make multi-asset transactions, market participants can use the Social and Copy trading features. In the case of Copy trades, a professional trader links his personal account to the platform so that other participants can copy his deals. Thus, a professional trader (provider) earns not only on his strategy but also has a percentage of trades copied by other subscribers. Subscribers, in turn, can earn on Forex even with beginner’s knowledge and experience. In addition, they can control copied transactions – change the volume of the trade in accordance with their deposit and money management, and even close positions manually.
Social trading is a kind of wider notion than Copy trading as it allows you to not only copy trades, but also interact with other participants, ask questions, evaluate their performance, and more. Traders have a profile, like in a social network, and through it, they share their opinions and trading operations.
One way to access these communities is through a trading platform such as eToro which provides a platform for social trading and investing, as well as the ability to automatically copy trades from other users with CopyTrader. You only need to subscribe to the trader and indicate the amount you want to invest in his portfolio. Also, with the CopyPortfolios function, you can subscribe to a whole group of traders, which allows you to diversify your investment without spending time studying each account separately.
Another international broker, NAGA Markets, offers an automatic copy feature through its platform to track and copy the best market participants who are professionals in their field. The auto copy feature helps you mirror their trades, strategies, and actions with just one click, all you have to do is find the trader you want to auto copy and determine the amount.
Trusted VPN services for safe Forex trading
Unsecured Forex trading in various instruments may carry some risks, such as leakage of personal information or anonymity breach from unwanted persons. In order to secure the transmission of information with strong encryption, hide activities from your Internet Service Provider (ISP) or protect against phishing attacks, professional traders recommend using Top VPNs for Forex trading.
VPN providers allow traders to use military data encryption algorithms on the Internet and show not their own, but a fake location, thereby protecting information about themselves from prying eyes.
Click the button below to register with one of the best VPNs for Forex trading:
In addition, thanks to virtual private networks, your personal information will be protected when using Wi-Fi in public places. The fact is that by using open Wi-Fi, we become susceptible to attacks. Connecting to the network somewhere in the park or in a cafe, our devices become an easy target for hackers and they can learn literally everything about us, down to bank passwords and private messages, which will be impossible if you are protected by VPN.
Top trusted brokers for Forex trading
Forex trading is gaining more and more popularity in recent years as one can earn by selling various assets, as well as using derivative financial instruments in order not to physically deliver the goods. To start your trading journey, you should begin with free brokerage demo accounts, as well as learn more about Technical and Fundamental analysis making your approach to trading professional and profound.
In addition, you can access the market from anywhere in the world and not be tied to a specific country with VPS and VPN services for Forex trading, which are provided by verified and regulated Forex brokers we compared below. They have the best trading conditions, various Forex bonuses even on initial deposits (subject to geographic availability), Copy trading, comprehensive educational materials for beginners, the latest financial market news for relevant trading decisions, and negative balance protection.
In addition, in order to diversify your portfolio and try active trading and investing, many market participants open several accounts with different Forex brokers, which allows you not only to insure yourself against possible risks, but also to compare different trading platforms, and also get all kinds of Forex bonuses up to 100% on your first deposit.
Exness Forex trading
Exness is a well-known Forex trading platform offering a wide range of trading instruments including currency pairs, stocks, indices, metals, energies, popular Cryptocurrencies like Bitcoin and Ether, and more rare coins.
The company is attentive to the needs and preferences of various clients, therefore it offers different terminals to choose from such as MetaTrader 4, MetaTrader 5, or MetaTrader WebTerminal, and it also has a mobile appl for iOS and Android to stay connected 24/7. In addition, those who wish to increase the speed can connect to a VPS server.
As for trading accounts, clients can find standard retail, and professional ones, as well as a demo for improving your skills and practicing your strategies without losing real money.
Exness follows strict safety standards and is regulated by FCA, CySEC, FSCA, FSC, FSA, and others. Try trading with Exness using our dedicated button below.
XM Group Forex trading
XM Group is a global online Forex broker with over 1000 trading products available on the MT4/MT5 platforms, including over 55 currency pairings, metals, commodities, and equities. The broker has a convenient mobile app that allows you to trade with a single login on a demo or live account.
In addition, XM provides customers with a VPS service that allows them not to worry about the speed of the Internet connection, computer problems, or other interfering factors.
The broker’s trading accounts have negative balance protection, good leverage, and tight spreads including Micro, Standard, XM Ultra Low, and Shares.
You can top up your account using a bank transfer, Visa, or MasterCard. Almost all electronic payment systems are supported. Besides, for all deposit/withdrawal operations, the broker provides zero commissions.
XM Group accepts clients from over 150 countries as it has accreditation from recognized regulatory bodies such as CySEC, IFSC, DFSA, and ASIC. The broker has a very attractive bonus program of up to 100% for the first deposit. You can find out more about all the offers and get special conditions right now by clicking on the button below.
Plus500 CFD trading
Plus500 is a broker founded in 2008, whose distinctive feature was initially CFD contracts, which made it possible to trade financial assets without purchasing them. The broker offers CFD on more than two thousand financial instruments for trading on a real and unlimited demo account to work out new strategies before entering the real market.
Plus500 provides its clients with a trading terminal developed by the company’s specialists individually. The trading program is available in several versions as a web terminal for PCs and laptops and a mobile application for Android and iOS.
Plus500 is a well-known Forex broker that holds licenses of FCA (UK), CySEC (Cyprus), SFSA (Seychelles), MAS (Singapore), AFSL issued by ASIC, FSP issued by the FMA (New Zealand), and Authorised Financial Services Provider license issued by the FSCA (South Africa).
Technical support of the company works without any delays, and if the FAQ section does not contain the desired answer, then the client can contact the company’s employees with his problem. You can try trading various instruments and compare the speed of execution of orders with our special button.
HF Markets Forex trading
HF Markets, known as HotForex before rebranding, is a well-known broker that provides accounts for a variety of purposes and multiple trading instruments, including Micro, Premium, Fixed, VIP, and Zero Spread accounts. Particular attention should be paid to Gold Forex trading, as the broker offers the most competitive spreads and no hidden commissions.
The company has provided MT4 and MT5 terminals for active trading, which are available on desktop, web, and mobile versions for Windows, iOS, macOS, and Android. In addition, it offers a wide range of trading tools and educational materials to make trading more efficient and safer.
One of the important and useful tools is Copy Trading HFcopy, which allows you to mirror transactions from many traders at the same time, saving time on market analysis.
As far as the security of your funds is concerned, the company is governed by CySEC and the FCA (Europe), the FSCA (South Africa), and the DIFC (Dubai), which are the authoritative bodies carefully monitoring all deals. You can evaluate all the possibilities of HF Markets and start your trading journey by tapping the button below.
AvaTrade Forex trading
AvaTrade is a large international brokerage company that occupies a leading position in the market niche for the provision of online trading services. The list of instruments available to traders includes currency pairs, commodities, indices, stocks, CFDs, Cryptocurrencies, and many others.
Among the trading platforms available are MT4, MT5, Proprietary, AvaSocial, AvaTradeGo, AvaOptions, and WebTrader. If you do not plan to be tied to a computer, there is always an AvaTrade mobile app.
Since the broker has a very large arsenal of financial instruments, for the convenience of traders, there is only one type of real account, the conditions which are selected by the market participant himself, depending on the chosen underlying asset and trading strategy. Also, a demo account is always free for clients to practice with a virtual balance of $100 000.
The broker is regulated by several international and regional financial authorities such as ASIC, FSA, Abu Dhabi, and the British Virgin Islands regulators. In addition, you will be able to use such a useful tool as the Ava Copy Trading – AvaSocial that enables you to copy the performance of professional traders you choose and gain with them the way they trade. You can learn more about trading with AvaTrade and create your own portfolio by clicking on the button.
eToro Forex trading
eToro is one of the largest social trading and investment platforms in the world. You can trade and invest in over 2000 different assets under the best conditions available, including minimal Forex and trading fees and low minimum deposits.
Clients can work on the broker’s own trading platform, which is available in two versions: in a personal account, as well as in the eToro app for Android and iOS. In the app, you can deposit and withdraw funds, trade, and candlestick charts, as well as copy trades and chat with other members.
eToro also offers all its clients a free demo account with a $100 000 virtual balance to build their own portfolio and practice unfamiliar instruments and strategies.
With over 15 years in the market, the broker has managed to establish itself in the online trading community as one of the most trusted brokers in the industry, as evidenced by its licenses from the FCA, ASIC, and CySEC. Try trading with eToro and get a special offer from TopForex.trade by clicking on the button.
Trading and investing in the Forex market - FAQ