Tips for Forex Trading in Emerging Markets
While forex has been a popular way for new and veteran traders to make money and invest, most of them have stuck to the more established markets and currency pairs. However, there is a growing movement of investors steering toward the lesser-known emerging markets.
At Oanda, they offer a wide range of emerging market currency pairs, but if you are unsure if you want to dive into the unknown, here is everything you need to know about trading in emerging markets.
What are Emerging Markets?
An emerging market is a country that is moving away from its traditional means of production and agriculture and has pivoted to be focused on industry. This then leads to more money being brought in through trade and raising the standard of living within the country.
India, China, and Brazil are some of the biggest emerging markets in the world. While they have a large production, import, and export market, their living standards are still low, meaning they are classified as emerging markets.
How to Trade in Emerging Markets
While there are numerous forex trading strategies you can implement when trading in the emerging market, there are a few things you need to pay attention to. These are aspects that you don’t look for when trading in established markets.
Growth in emerging markets is almost guaranteed due to governments investing a lot of money into industrialization, which leads to large and persistent growth and a rise in employment across most sectors.
There is also more growth compared to established markets as the rise has already happened. The United States can’t expand drastically more right now, for example, as opposed to South Africa, which hasn’t come close to its plateau yet.
Have a Plan
When you choose to trade in emerging markets, you need to have a solid plan. You will need to be consistent with research and finding out what is happening in the business and government spending sectors.
While building infrastructure for something can take a long time, a government committing the money to do it is what you need to pay attention to. You can keep track of where investment is happening and how it affects the financial and investment relationships of the country.
Risk vs. Reward
The risk vs. reward discussion in emerging markets revolve around volatility. Emerging market countries have high volatility due to the lack of liquidity in their assets. This can cause slowdowns and drastic changes that can deter investors.
When assessing risk and reward in emerging markets, it is essential that you understand how something can influence an economy, and if it has a positive or negative effect on the currency you are trading.
Biggest Emerging Markets
There are a few emerging markets that you should be paying attention to if this is the field you want to begin trading in. As mentioned, India, China, and Brazil are massive emerging markets, but there are a few lesser-known ones.
Bangladesh, the Philippines, Croatia, Turkey, Mexico, and Greece are all examples that you should be paying attention to.
Advantages of Emerging Markets
One of the most significant advantages of trading in emerging markets is the fact that they are often not affected by the same things that hit established markets. Considering emerging markets have such a steep growth curve, many problems don’t cause the currency to slip in a big way.
Emerging markets are also great for diversifying your portfolio, as it is somewhere you can possibly take a risk if you want. On the other hand, if you make a good choice and make a profit, you now have a good mix of established and emerging investments that are both making you money.
Are Emerging Markets Undervalued?
The final question you may have is, are emerging markets undervalued? This is a loaded question as value is determined by who is investing. A better question is if a currency is overvalued.
A currency being overvalued can happen for many reasons, but it is only something to consider depending on the type of investor you are. An overvalued currency is excellent for short-term investors, as a profit is almost guaranteed. A long-term investor will almost always pass on overvalued currencies, as the value will eventually drop, and you can possibly lose money.