Foreign Exchange Trading Demystified
The foreign exchange market is mystifying to many people. There is good reason for this, since these financial markets are among the riskiest in which to trade. This article will explore the topic of the foreign exchange market, what makes it so risky and how to understand it a little better.
Firstly, what is the Foreign Exchange market anyway? What are we trading? Its simple really, we are trading money from different countries. We buy money (which is called currency) in one country by selling currency from a different country. Its an extremely important market for the proper functioning of the global economy. You may not be aware of this, but as a consumer, you have almost definitely participated in this market either directly or indirectly, and probably do so every day.
Maybe it was in the course of a vacation out of the country, or on a business trip, that you had to use local money for transactions. Whether you were operating with traveler's cheques, hard cash or on credit, during the course of any transaction there was an exchange that took place. Right away you will realize that the FX Market has been a part of your life.
An example of indirect participation is when you buy imported products in your home country. Products made overseas are usually sold in the currency of the country they were made. When they are sold in a country which is different to the one where they were produced, at some stage someone will need to make a foreign exchange transaction, translating the price of the product from the currency where the product was produced, to the currency where the product was consumed. It could be the producer, an importing company or the retailer that does this. Regardless, when you buy imported products, the currency translation will have occurred and therefore you have indirectly participated in a foreign currency transaction.
Why do the value of particular currencies change? The basic reason why the price of a currency changes is simple, its supply and demand. When there are more people who want to buy a specific currency than there are people who want to sell it, the price goes up. (Ie. those who want to buy, will offer a higher price to attract more sellers into the market.) Conversely, When there are more people who want to sell a specific currency than there are people who want to buy it, the price goes down. (Ie. those who want to sell will offer a lower price to attract more buyers into the market.) Thats the simple answer.
One of the most difficult concepts to grasp is why certain currencies are so volatile. At times, even the experts are left scratching their heads as well, watching the waves of supply and demand with baffled looks on their faces. To succeed in the FX Markets, traders need to keep many different factors in mind and invest with experience, but answers aren't as simple as "yes" or "no" in this game. Formulas are just as scarce, so the more insight a trader has and the more research they've done, the better their chances.
Currency prices are a measure of a countries "economic value" as compared against another countries "economic value". If you think about the myriad of factors which impact people's perceptions of the economy of the country you live in, you can start to understand why predicting FX price movements is difficult.
But your countries economy is only half the equation. We are not measuring the value of your economy alone, rather comparing it against the economy of a different country. Therefore, even if you have a really good understanding of your own economy, you need the same understanding of the other country's economy also.
Further, your currency trades against all the currencies in the world. So you need to know exactly how each individual economy is going, to compare it against your economy before making a judgement call about whether you think the exchange rate will go up or down.
Once you've completed your research and are ready to make some exchanges, you're also subject to the whims of the world itself. With a consumer crisis or confidence slipping due to the bad performance of central banks, you may see a currency shift you never expected. Fundamental traders who are weighing all the factors mix with the traders called technical traders, who mainly crunch numbers.
Some investors will buy currencies with long-range goals in mind. With a big investment in currencies, they use it to support other ventures, which also has an effect on the currency's value.
Strategies for trading on the Foreign Exchange Market may not involve the expectation of dips in prices. Whether a currency is dropping or rising in value, the investor will see small gains.
Hopefully, this explanation of various factors affecting the Foreign Exchange market has served to illuminate the subject. - 23221
Firstly, what is the Foreign Exchange market anyway? What are we trading? Its simple really, we are trading money from different countries. We buy money (which is called currency) in one country by selling currency from a different country. Its an extremely important market for the proper functioning of the global economy. You may not be aware of this, but as a consumer, you have almost definitely participated in this market either directly or indirectly, and probably do so every day.
Maybe it was in the course of a vacation out of the country, or on a business trip, that you had to use local money for transactions. Whether you were operating with traveler's cheques, hard cash or on credit, during the course of any transaction there was an exchange that took place. Right away you will realize that the FX Market has been a part of your life.
An example of indirect participation is when you buy imported products in your home country. Products made overseas are usually sold in the currency of the country they were made. When they are sold in a country which is different to the one where they were produced, at some stage someone will need to make a foreign exchange transaction, translating the price of the product from the currency where the product was produced, to the currency where the product was consumed. It could be the producer, an importing company or the retailer that does this. Regardless, when you buy imported products, the currency translation will have occurred and therefore you have indirectly participated in a foreign currency transaction.
Why do the value of particular currencies change? The basic reason why the price of a currency changes is simple, its supply and demand. When there are more people who want to buy a specific currency than there are people who want to sell it, the price goes up. (Ie. those who want to buy, will offer a higher price to attract more sellers into the market.) Conversely, When there are more people who want to sell a specific currency than there are people who want to buy it, the price goes down. (Ie. those who want to sell will offer a lower price to attract more buyers into the market.) Thats the simple answer.
One of the most difficult concepts to grasp is why certain currencies are so volatile. At times, even the experts are left scratching their heads as well, watching the waves of supply and demand with baffled looks on their faces. To succeed in the FX Markets, traders need to keep many different factors in mind and invest with experience, but answers aren't as simple as "yes" or "no" in this game. Formulas are just as scarce, so the more insight a trader has and the more research they've done, the better their chances.
Currency prices are a measure of a countries "economic value" as compared against another countries "economic value". If you think about the myriad of factors which impact people's perceptions of the economy of the country you live in, you can start to understand why predicting FX price movements is difficult.
But your countries economy is only half the equation. We are not measuring the value of your economy alone, rather comparing it against the economy of a different country. Therefore, even if you have a really good understanding of your own economy, you need the same understanding of the other country's economy also.
Further, your currency trades against all the currencies in the world. So you need to know exactly how each individual economy is going, to compare it against your economy before making a judgement call about whether you think the exchange rate will go up or down.
Once you've completed your research and are ready to make some exchanges, you're also subject to the whims of the world itself. With a consumer crisis or confidence slipping due to the bad performance of central banks, you may see a currency shift you never expected. Fundamental traders who are weighing all the factors mix with the traders called technical traders, who mainly crunch numbers.
Some investors will buy currencies with long-range goals in mind. With a big investment in currencies, they use it to support other ventures, which also has an effect on the currency's value.
Strategies for trading on the Foreign Exchange Market may not involve the expectation of dips in prices. Whether a currency is dropping or rising in value, the investor will see small gains.
Hopefully, this explanation of various factors affecting the Foreign Exchange market has served to illuminate the subject. - 23221
About the Author:
If you are bored of your slow mutual fund investment, Damian Papworth suggests FOREX trading. The speed and possible returns are hard to beat.
posted by X - Men @ 9:50 AM
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