Forex Trafing Fundamentials
The forex market is one where currencies are bought and sold using other currencies to pay with. Profits are made by buying a certain currency when its value is relatively low (relative to the currency used to pay with) and then selling it once its value has risen (again, relative to the other currency involved in the trade). This means that in every forex trade two currencies are involved, the one bought and the other by which payment is made, these two currencies are commonly referred to as a “currency pair”.
The forex market is the biggest financial market in the world, some three billion dollars worth of forex trades are conducted each and every day, over 90% of which are made by traders working to make a profit (rather than in money transactions necessary for conducting business with people or companies in other countries).
The forex market is considered to be one which holds great opportunity for profits both short and long term, but there are also inevitable risks involved in forex trading, therefore, it is essential that anyone engaging in trading on currency pairs educate themselves sufficiently so that they may make informed decisions and trade responsibly.
In the following paragraphs you’ll find basic information which will help set you on your way.
Interest Rates and Their Effect On a Countries’ Currencies
We all know that central banks in every country set an interest rate on which commercial banks and other financial institutions (such as insurance companies, investment houses, brokerage firms, etc.) base the interest rates they charge their clients as well as offer them.
Interest rates affect forex traders in two important ways:
Firstly, a low interest rate is a good indication of a currency’s strength and stability, in countries with strong economies the interest rates tend to be low, this way it is easier for businesses to finance operations (they can receive loans at good terms and do not struggle to pay them back).
Another reason for forex traders to pay attention to interest rates is the opportunity to buy currencies belonging to economies with high interest rates while paying for them using currencies belonging to economies with relatively low interest rates. Trading in this fashion is called “carry trade” and allows for earning the difference between the two interest rates, however, if too many traders attempt to cash in on such an opportunity the interest rates will begin shifting the other way.
Other Indicators of Strong Economies
Since there is usually a correlation between the strength of a country’s economy and the value of its currency (relative to other currencies) it is important to know the signs which indicate that a certain country’s economy is booming.
One thing to look out for are reports released by the country’s authorities (government institutions) as well as international organizations. Such reports are released at regular intervals, deviation from expected figures will lead to market adjustments, this means opportunity for forex traders who can predict the effect on the value of a certain currency.
One of the main indicators of the strength of a country’s economy is the Consumer Price Index (CPI). If this index rises, it means that the cost of living is rising, this may be good, if people are earning more, or worse if there is high unemployment for instance.
Another indicator to look for is a country’s Gross Domestic Product (GDP) this shows the value of all that’s produced in the country during the course of one year (both goods and services).
So far as indicators such as those described above go it is important to realize that their current value is hardly all that matters, it is essential to pay heed to trends and fluctuations.
Prices of Main Products Exported From a Certain Country
There are countries where a major part of the economy is based on a certain commodity, such as crude oil, coal, rice, gold, etc. The value of such a country’s currency will tend to rise when the price of the relevant commodity rises (and fall when the price of the commodity drops).
There are some 180 different currencies in the world (including digital ones, with bitcoin leading the field, not belonging to any country), most all can be bought and sold. But there are currency pairs which make up the bulk of worldwide forex trading, currencies such as the U.S dollar, Euro, Canadian dollar, Japanese Yen, Chinese Yuan, Swiss Franc and others are the ones forex traders should gain in depth knowledge about.