As you get more accustomed to the Forex markets, you’ll notice that there’s two equally valid Forex strategies – Forex investing and Forex trading. While both have a place in the market – and sometimes in the same portfolio –  they involve different ways of evaluating Forex picks and a completely different mindset. How do you know which will suit you better? What does it matter? Today the Trade & Train team take a look.

What is Forex trading?

When we talk about Forex in general, a Forex trader is what leaps to mind. By far most of the people who get into Forex are doing it with trading in mind. Think of exchanging currency on holiday. You present a specific currency, and get a set amount of a different currency back, based on the exchange rate. This does fluctuate constantly, driven be supply and demand. In turn, this supply and demand is driven by a range of factors, including geopolitical events. 

Forex plays out on a global marketplace that’s never shut. You can trade 24/7, with major financial centres throughout the world. A global network of ‘big players’- banks and financial institutions- watch over the market, rather than a central exchange.

So what is Forex investing? 

Forex investing could be two things. One is a very specific, long-term way to trade Forex. Here we’re not day trading, or even holding positions for weeks, but rather hanging onto them for months before moving. It’s a very low-key way to trade Forex, and not really where the value in Forex trading lies. It’s a valid longer-term strategy and worth having on your radar, but it only suits a very specific type of trader and probably isn’t what you were expecting Forex trading to be.

The second use of the term ‘Forex investing’ is both confusing and highly incorrect. It’s used to refer to what should properly be called Forex trading, drawing parallels between it and the stock market. It’s a bad trap to fall into, however, because the two are nothing alike.

So what is general investing, then?

As with Forex trading, general investment involves leveraging a financial market to help your capital grow. That’s more-or-less where the similarities stop, however. Because both markets offer you a way to grow your capital faster than a savings account they’re often lumped in the same category. This is something of a disservice to both types of financial growth, however.

Classic investing happens on the stock market, through stock exchanges. You buy micro-fractions of a company that’s ‘publicly listed.’ From there on out, you are something of an ‘owner’ in the company. When they do well and their stock rises, you can exit and make a profit on your original investment. Should they do poorly, stock value will drop. 

Investment vehicles have broadened from just stocks, and now include items like Exchange Traded Funds and ETNs, which are index trackers rather than tied to stocks. There’s also commodities training, which is related, but here it’s items like oil which are traded, not stocks.

Typically, you use a completely different strategy to invest in the stock market, and most people are best served by buying and holding. Nothing like the day trading and short term investment of Forex.

How is Forex trading different from investing?

Besides the fundamental difference in what is being traded, what differentiates Forex from general investing? As we mentioned above, Forex markets are active 24/7 Monday to Friday. This is unlike the stock exchanges, which shut through their non-business hours. Talking about which, the stock exchange is a central, physical exchange for stocks. This is opposed to the global financial institution network for Forex. 

Obviously, global trends and some geopolitical events can have an impact on how overall markets are affected, as with Forex. Similarities end there, however. There’s nothing like currency pairing, and the market terminology, ins and outs, and overall ways you trade are very different. While both Forex trading and investment can have a place in a diversified financial portfolio, it’s best not to confuse the two.

Why should I trade Forex?

Forex trading has many advantages over ‘normal’ investment. One is that you need very little access to capital to enter the Forex markets. With a micro-brokerage account, almost anyone can safely trade Forex. Trading Forex is a highly liquid market, too, and you will come in and out of trades very fast, nothing like on the stock market. 

While Forex can be a volatile market- and with volatility comes risk, always- it’s also an immensely satisfying one. There’s a satisfying challenge in identifying the right currency pairs and leveraging them to make a good return. Finding the right trading strategy and performing your analysis will come to be a fun challenge , and you get to see immediate results. With those risks come immense rewards. Few people who enter Forex trading regret the choice.

While investment can be satisfying too, it’s best done with a ‘set it and forget it’ mentality. It’s only served by long positions, often years or more. It’s a very different skillset to learn.

Are you keen to start your Forex trading journey today? The Trade & Train team are always here to help you make the best of your beginning journey with Forex. Our handy Essential traders Forex course will soon have you comfortable with the unique complexities of the Forex market and ready to start your own Forex trading journey.