Foreign Exchange Trading Demystified
If you ask the average investor about thoughts on good investments, you're unlikely to hear the foreign exchange market as a popular answer. It is confusing to many people, and its high risk factor doesn't help. This article will try to clear up some of the mystery surrounding foreign exchange.
What exactly does foreign exchange mean? What are the nuts and bolts of this market? Quite simply, it's the money used in different countries around the world. An investor buys money (known as currency) from one country with the sale of money from another. Without this transaction process, the global economy would stop. Whether you know it or not, you have probably engaged in the foreign exchange market already. In fact, it may be an everyday occurrence for you.
Maybe it was on your last vacation; maybe you went to Rome on business, changing some money for a night on the town. Even if you used a traveler's cheque or swiped a credit card, you aren't operating with your native currency if you are in a foreign country. Welcome to the exchange market, which you've already played.
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.
Maybe you have been mystified by the fluctuating currencies of different countries. Like most things in the business world the currency's supply versus its demand changes the rate. When a currency comes into high demand, with few sellers on the market, that makes it instantly more valuable. Buyers will pay a higher price to get their hands on it. Conversely, when a currency is unwanted and sellers flood the market looking to dump it, the price goes down. Those willing to take on such an unattractive commodity pay less to do so. The explanation is simple when you think in this manner.
The really tough question though is what makes supply and demand change? This is the 1 question which makes trading in the FX market so difficult. Basically, no-one knows exactly what all the factors are that cause supply and demand to change in these markets. Many traders have a good idea of the major influences, but there are so many things which impact currencies that it is nigh on impossible to formularise the exact reasons currencies change price.
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.
Of course, one country's economy is only one part of the overall equation. The strength of the other country's economy is equally important. It doesn't do you a tremendous amount of good to be the master of one country when deciding to trade in the currency exchange markets, if you aren't familiar with the other currency you're trading.
On top of that, your currency will be stacked up against the entire world's currencies. At this point you need a truly global perspective, weighing extremely diverse factors, before you decide one country's currency will spike in value while another will remain stagnant.
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.
There are even people who buy currencies months and years in advance to lock in a price, to help support business activities unrelated to FX trading. This also impacts price. So you can start to see what a complex equation this can become.
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.
Getting a handle on the FX Markets is never a simple matter, and hopefully this explanation has helped. - 23305
What exactly does foreign exchange mean? What are the nuts and bolts of this market? Quite simply, it's the money used in different countries around the world. An investor buys money (known as currency) from one country with the sale of money from another. Without this transaction process, the global economy would stop. Whether you know it or not, you have probably engaged in the foreign exchange market already. In fact, it may be an everyday occurrence for you.
Maybe it was on your last vacation; maybe you went to Rome on business, changing some money for a night on the town. Even if you used a traveler's cheque or swiped a credit card, you aren't operating with your native currency if you are in a foreign country. Welcome to the exchange market, which you've already played.
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.
Maybe you have been mystified by the fluctuating currencies of different countries. Like most things in the business world the currency's supply versus its demand changes the rate. When a currency comes into high demand, with few sellers on the market, that makes it instantly more valuable. Buyers will pay a higher price to get their hands on it. Conversely, when a currency is unwanted and sellers flood the market looking to dump it, the price goes down. Those willing to take on such an unattractive commodity pay less to do so. The explanation is simple when you think in this manner.
The really tough question though is what makes supply and demand change? This is the 1 question which makes trading in the FX market so difficult. Basically, no-one knows exactly what all the factors are that cause supply and demand to change in these markets. Many traders have a good idea of the major influences, but there are so many things which impact currencies that it is nigh on impossible to formularise the exact reasons currencies change price.
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.
Of course, one country's economy is only one part of the overall equation. The strength of the other country's economy is equally important. It doesn't do you a tremendous amount of good to be the master of one country when deciding to trade in the currency exchange markets, if you aren't familiar with the other currency you're trading.
On top of that, your currency will be stacked up against the entire world's currencies. At this point you need a truly global perspective, weighing extremely diverse factors, before you decide one country's currency will spike in value while another will remain stagnant.
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.
There are even people who buy currencies months and years in advance to lock in a price, to help support business activities unrelated to FX trading. This also impacts price. So you can start to see what a complex equation this can become.
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.
Getting a handle on the FX Markets is never a simple matter, and hopefully this explanation has helped. - 23305
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 Mr. Forex at
9:48 AM
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