This article is for informational purposes only, and should not be construed as financial or legal advice.
There are two popular ways traders can make money in forex: trade or invest in forex. The difference between the two is often confusing for many people. When you trade forex, you engage in the activity of trading, i.e., the process of buying and selling currency pairs. This requires in-depth market knowledge and an active forex account with a reputed forex broker. On the other hand, when you engage in forex investing, you don’t trade per se. Instead, you seek out opportunities where you invest in funds managed by professional traders who trade on your behalf. There are other ways that forex investing is done. So, in the article, we will differentiate between the two, explain how the two forms of financial activities are carried out, and recommend which one you should go with.
Difference between Forex Trading and Forex Investing
Investing is often associated with the stock market. So, when you tell people that they can invest in forex as well, they are surprised! But whether you invest in stocks or forex, the ultimate goal remains the same: focus on long-term growth and stability.
Forex trading, much like any other form of trading, revolves around short-term price movements. If you invest in forex, you must take a more patient and strategic approach to capitalise on broader trends and economic shifts.
One popular method of Forex investing is through managed Forex accounts. Managed Forex accounts provide an opportunity for investors to have their trading and investments handled by professional traders or money managers. MAM and PAMM are the two popular types of investment accounts used by investors to invest their money in the Forex market. You can choose the account type that aligns with your requirements and goals.
These accounts offer a passive investment approach for those who may lack the time, expertise, or inclination to actively trade the Forex market. In this arrangement, a seasoned and skilled money
manager takes charge of executing trades and managing the portfolio on behalf of the investor.
Compared to forex trading, forex investing has fewer risks if you invest in well-searched options. However, forex trading has a high chance of failure because it requires extensive market knowledge. And for new traders, this could be challenging. This is why many new traders choose to invest in forex-managed accounts.
It may also be helpful to understand expert trading strategies to reduce risk for MT4 users.
Benefits of Managed Forex Accounts:
Before you decide to invest or trade, it’s good to know the benefits of both. Here’s how opening a forex-managed account can help you –
- Expertise: The biggest benefit you will get by opening a forex-managed account is access to the expertise of professional traders. You don’t have to spend time studying the market, as the manager will take care of all the trades for you.
- Time-Saving: you can save time and effort by delegating trading decisions to experts. This is your chance to grow your financial income, even if you are tight on schedule.
- Diversification: New traders have to take precautions, and there is a limited scope of diversification for them because of the higher risk. As a result, they stick to only selective trading pairs. But money managers know how to diversify and get the most out of the market. Hence, they employ diverse trading strategies and spread investments across various currency pairs to help you get the maximum return.
- Customization: You can customise your managed Forex accounts to your risk tolerance and financial goals. Even you have the flexibility to choose strategies that align with yours. So, you can prioritise capital preservation or aggressive growth.
Managed accounts are only one of many ways to invest in forex. Further, in this article, we will talk about other ways to invest. But let’s first discuss different ways to trade in forex –
Different Methods To Trade Forex
The process of trading remains the same, regardless of the method you choose to use. Depending on the level of risk and your knowledge, you can choose any of the following methods to trade forex. But before you pick any of these, try to trade with a demo trading account. These accounts help you trade in practice mode before you can risk money.
- Spot Trading: The most common Forex trading method involves the immediate exchange of currencies at prevailing market rates.
- Forward Contracts: Forward contracts enable you to secure future exchange rates, helping hedge against currency fluctuations. It is common for businesses managing foreign exchange risk to engage in trading.
- Futures Trading: Forex futures entail standardised contracts dictating future currency purchases or sales at predetermined prices. Institutional traders and speculators frequently use this trading strategy.
- Options Trading: Forex options grant the right to buy or sell currency at a set price within a specified time frame. This strategy offers flexibility and risk management.
- CFD Trading: Contract for Difference (CFD) trading allows speculation on currency price movements without owning the actual asset. Beneficial for both rising and falling markets.
- Algorithmic Trading: Algorithmic trading involves the automated execution of trades based on predetermined criteria. Institutional investors and traders commonly utilise this approach.
- Copy trading: It is an easy way for less experienced traders to enter the world of forex. When you copy trade, you mimic the strategies of experienced traders to earn profits.
Different Methods To Invest In Forex
We have already discussed forex-managed accounts as one of the best methods to invest in the forex market. If you go for this method, then you need to know two things — the types of managed accounts and how to select your Forex manager.
Typically, managed accounts are of two types: PAMM and MAM accounts. Although both accounts require a money manager to control your accounts, there is a slight difference in how they operate. Trades are distributed to MAM account holders according to lot sizes, and they are also distributed among PAMM account holders according to the share of funds that each investor contributes. Moreover, if you open a PAMM account, you will have more flexibility in terms of investment sizes compared to an MAM account, where there is more precise control over trade allocation.
Coming to the forex manager part, you need to be very careful who you rely on. Thoroughly inspect the fund managers and the broker with whom you are opening your forex-managed account. If you choose a broker that is reputed in the market, you are more likely to get a better manager since the broker monitors these accounts. However, do not be laid back. Do research to check your money manager’s performance over time, and sign up with one that you find suitable in terms of returns and trading capabilities.
Besides MAM/PAMM accounts, you can also try the following ways to invest in the forex market –
Currency certificates, also known as currency-linked notes, are financial products issued by banks or financial institutions. This is a great opportunity to benefit from the performance of specific currency pairs. These certificates often have a predetermined maturity date and may include capital protection or enhanced returns.
If you choose this mode of investing, you will have to bet on the relative performance of two currencies. If the specified currency pair appreciates within the certificate’s time frame, you will get a return based on the predefined terms. However, currency certificates can be complex; you should carefully review the terms and risks associated with these instruments.
Which is better for you?
The choice between Forex trading and investing should be based on your experience, time commitment, and financial objectives. Both forex trading and investing have their benefits and limitations. Trading can yield rapid gains but requires continuous engagement and expertise. Investing, especially through managed accounts, offers a more hands-off approach. However, it will only give you the expected results if you put your money and faith in a reliable money manager.
Forex trading and investing are two of the most popular ways to engage in the forex market. In this article, we have explained how the two are different from each other. There is no best of the two. Your appetite for risk and investment style determines your choice between forex trading and forex investing. But before you move forward, understanding the nuances of each approach is pivotal to forging a path to financial success. Regardless of what you choose, the forex market offers endless opportunities for traders to grow.