What Should Be Your Strategy for Passive & Active Investing In Forex Trade?

What Should Be Your Strategy for Passive & Active Investing In Forex Trade?

Passive and Active investment in Forex trade are different from each other. You need to formulate different strategies for them. Earning profit depends on how you formulate the strategies.

Passive and Active Investing in Forex trade are two contrasting methods. But both are popular among the Forex traders. It depends on the risk bearing capacity of the investor. Passive investing will be suitable for you if you want to invest limited quantum of fund and also look for limited profit.

The larger wealth creation is possible through Active investing but larger risk of loss running is also associated with it. This is not there with the Passive investing.

You can prevent your loss by learning the differences between these two types of trade. The three main differences between Active investing and Passive investing are explained below:

  • Active investor means the trader is actively investing in Forex trade on a regular basis. He is creating an investment portfolio. He is buying larger quantum of Forex currency pairs and also selling them in large quantum.
  • Active investor takes greater risk. A passive investor in pair currency is a safe player who avoids taking high risks.
  • Active investor diversifies his investment in pair currencies whereas a Passive investors selects only a limited number of pair currencies.

What Is Active Investing Strategy?

As an Active investor in Forex, you should do regular market analysis. This strategy will help you to understand the short term, mid-term and long-term market positions.

Active investing strategy aims at the following:

  • Forex broker aims to beat average index returns.
  • Take a decision on investing in Exchange-Traded Funds.
  • Create your own Forex pair currency portfolio.
  • Stop possible loss due to short-term Forex market price fluctuations.

Merits of Active Investing

You can get several benefits through Active investing in Forex trade. Active investing can help you increase your volume of income. Following are the benefits of Active trading:

  • Playing Safe In A Volatile Market Condition: As an Active investor, you have several portfolios. You can defend your investment by Holding your pair currency for future profit booking.
  • You Can Hedge With Options: You can get this benefit as Active trader. You have Option to sell currency pair with upswing trend and buy the pair with downswing trend. Downswing trend means cheaper pair currency. You can buy them and hold for future when the market of the pair currency goes up.
  • Benefit of TaxLoss Harvesting: This business strategy will help to Harvest tax benefits. Though the Passive Investors can also adopt this strategy, it is particularly useful for Active traders as their volume of trade much larger than those of the Passive traders. Due to large volume of trading, the volume of income is also high. By availing Tax-Loss Harvesting, the Active traders can get tax exemptions on their income. 

Demerits of Active Investing

Active investing has some demerits also. You may find this type of trading disadvantageous for you in few cases. The most disadvantageous factor is that you have to pay high brokerage charge to the broking house you are associated with.

The other two demerits of Active investing are listed below:

  • You Have To Pay High Expense Ratio Fee: An Active trader usually deals in bulk pair currency in Forex market. This requires research and analysis on a daily basis. But it costs money to carry out researches and studies on EFT and Forex markets. Your broker may charge higher amount of money to provide you with this benefit of market studies.
  • Exposure To Greater Market Risk: Forex market is volatile. Price swings takes place very often. As a bulk buyer of pair currencies, you have already invested heavily in different portfolios. There will be high as erratic price swings may wash out your profit.

What Is Passive Investing Strategy?

Passive investing is a strategy of Buy and Hold in smaller number of pair currencies. As a Passive trader, you do long term trading by Holding your Forex. You invest smaller amounts as compared to Active trading in this type of business.

Active investing strategy aims at the following:

  • You don’t want to be exposed to erratic Forex market condition. You avoid fluctuations and market price swings. When swings in prices take place, you generally hold your assets for future profit.
  • Passive trading may be good for retired persons and small investors.
  • Unlike an Active investor, you don’t need to watch the Forex market on a daily basis. You can do it leisurely as high stake is snot involved in this type of trading.

Merits of Passive Investing

Your number of transactions and payouts are limited. This eliminates need of account-keeping on a larger scale and on a daily basis. Following are the benefits of Active trading:

  • Low Risk: You trade in only a few or limited number of Forex pair currencies. This means you may not run into loss if a particular pair currency suffers downswing due to a Bearish market. Your investment is low. You can easily hold such currency pairs.
  • Gain Is Steady: You get this benefit as your limited number of pair currencies can gain in the long run.

Demerits of Passive Investing

This has few demerits. As a Passive investor, you are not risk taker. Your investment and currency portfolio is also small. Your risk factor is minimized greatly as your Forex financial stake is also low.

This type of trading has following demerits:

  • Investment-Income Portfolio is low. You cannot grow rich in a short span of time.
  • In a Bullish market condition also, your income is hiked by a small amount proportionate to your small investment.

You can start by being a Passive investor in the initial days of your involvement in the Forex market and gradually move up to become an Active trader when you know every aspect of this business.

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