If you’re thinking about starting a business or expanding your investment portfolio, then you may be considering trading Forex as a potential option. Forex is really a hybrid between both opportunities and in this article, you will learn why and also what you need to get started!
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Forex as an Investment
Unlike stocks and shares, Forex trades tend to last a much shorter period of time. Whilst there are opportunities to hold trades long-term (swing trading), the majority of forex traders take advantage of shorter term moves.
Forex traders hold their trades anywhere from minutes to weeks, but very few traders hold these trades for months or years as you would with stocks, which is the first significant difference from traditional trading.
Another difference is that you are not buying the asset as such. A currency pair is two currencies paired together, for example, EUR USD. From here, you are almost ‘betting’ on whether you think the EUR will gain value against the dollar.
This allows you to buy or sell the pair, which is another difference from stock trading. You can effectively make money whether the currency is rising or falling.
However, there are some similarities between forex and stocks. Both are leveraged products, meaning you can expose yourself to a bigger portion of the market than the capital you have available. Stocks tend to have smaller leverage than forex.
Both also require technical analysis to learn to do it well, but there are more opportunities to trade forex as the market is open 24 hours per day.
Forex as a Business
Forex (unlike stocks) can have a more hands-on approach as it’s not just a case of buying and holding. This means if you want to trade daily and treat it like a business then you can absolutely do that.
In addition, HMRC has some grey areas when it comes to taxation and uses a system called ‘badges of trade’ to determine if you are an investor or a trader. Investors pay capital gains on their profits whereas traders are subject to income tax. Whilst many forex traders submit a tax return for capital gains tax only, the reality is that, in many cases, they would fall into the trader category. This is primarily because most forex traders trade on a regular basis, buying and selling often, as opposed to buying, holding, and selling in the distant future for a one-off profit.
In a nutshell, HMRC can consider forex trading as a business rather than an investment as well.
Things You Will Need to Trade Forex
If you are just starting out in Forex, you should spend some time learning to chart and perfecting your strategy prior to trading live. Demo trading is also a great way to hone your skills. There are loads of websites offering free courses for trading such as Baby Pips which will teach you the basics.
You’re also going to need some good charting software like Trading View (which has a free plan) and also a decent computer. Lenovo desktops for trading are a good option for this.
You don’t need a really powerful computer as charting software is often cloud-based and your execution platform such as MT4 doesn’t need a huge amount of processing power, but a good quality everyday desktop will work great.
Forex trading can be considered either an investment or business, depending on how you decide to treat it. If you are holding trades long term, you are probably considered an investor by HMRC, whereas if you’re holding them short term, you are a trader.