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.
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.
If you have ever gone overseas on a holiday or for business, you would have needed to obtain currency in the country you visited. It doesn't matter if you used travellers cheques, credit card or cash, by functioning as a consumer overseas you would have needed to buy some local currency with the money you earned at home. It is this transaction that had you participating directly in the FX Market as a consumer.
Often, we are involved in the exchange market indirectly, as consumers who purchase goods from another country. Anything imported was either bought or sold with an exchange in currency. Next, a calculation by the importer will set the price for the foreign goods in the country where it will be sold, taking the entire scale of exchange into account. While you might have forgotten that it took this sort of arrangement for foreign goods to make their way to local stores, it happens every day of the year. The FX market has everyone involved, from tourists to exporters, from consumers to importers. The exchange of currencies makes it happen.
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.
The hard part is determining the root of supply and demand fluctuations. Therein lies the complex part of foreign currency exchange. Not even economists can pinpoint exactly the cause of demand and supply changing like the tides. Being a good trader is having a grasp on the big factors and investing accordingly, but there is definitely no simple answer and thus the market of currency exchange is not a simple game to play. There are no formulas.
The currency figures of a particular country represent the economic value of that country, thus compared against that of another country. When you start to consider the endless number of factors which can affect an economy in one direction or another, and how some of them defy all logic, you will see the dilemma of anyone who is trading currency for a living.
Remember that the economy of a country only makes up half of the total equation. It must be weighed against the economy of another country to decide its value in the world at large. Having a great understanding of one economy only works when you have an equal understanding of the second country's economy.
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.
Even if you have done your homework and are ready to make some smart moves, you must hope that everyone else cooperates. Currencies may change when someone's opinion changes, when some projected numbers have come in high or low, or even when other investors in another part of the world make a move. The fundamental traders, who weigh all the issues when making trades, are in the mix with technical traders, who operate on numbers alone. Each has its own place in the movement of prices.
There are also types of investors who buy currencies far in advance of any hopes of selling, waiting to see the long-term growth. Many use this investment to support other, unrelated ventures. Naturally, this will affect the prices. It's a complicated equation.
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.
I hope this helps take some of the mystery out of the FOREX market. - 22871
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.
If you have ever gone overseas on a holiday or for business, you would have needed to obtain currency in the country you visited. It doesn't matter if you used travellers cheques, credit card or cash, by functioning as a consumer overseas you would have needed to buy some local currency with the money you earned at home. It is this transaction that had you participating directly in the FX Market as a consumer.
Often, we are involved in the exchange market indirectly, as consumers who purchase goods from another country. Anything imported was either bought or sold with an exchange in currency. Next, a calculation by the importer will set the price for the foreign goods in the country where it will be sold, taking the entire scale of exchange into account. While you might have forgotten that it took this sort of arrangement for foreign goods to make their way to local stores, it happens every day of the year. The FX market has everyone involved, from tourists to exporters, from consumers to importers. The exchange of currencies makes it happen.
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.
The hard part is determining the root of supply and demand fluctuations. Therein lies the complex part of foreign currency exchange. Not even economists can pinpoint exactly the cause of demand and supply changing like the tides. Being a good trader is having a grasp on the big factors and investing accordingly, but there is definitely no simple answer and thus the market of currency exchange is not a simple game to play. There are no formulas.
The currency figures of a particular country represent the economic value of that country, thus compared against that of another country. When you start to consider the endless number of factors which can affect an economy in one direction or another, and how some of them defy all logic, you will see the dilemma of anyone who is trading currency for a living.
Remember that the economy of a country only makes up half of the total equation. It must be weighed against the economy of another country to decide its value in the world at large. Having a great understanding of one economy only works when you have an equal understanding of the second country's economy.
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.
Even if you have done your homework and are ready to make some smart moves, you must hope that everyone else cooperates. Currencies may change when someone's opinion changes, when some projected numbers have come in high or low, or even when other investors in another part of the world make a move. The fundamental traders, who weigh all the issues when making trades, are in the mix with technical traders, who operate on numbers alone. Each has its own place in the movement of prices.
There are also types of investors who buy currencies far in advance of any hopes of selling, waiting to see the long-term growth. Many use this investment to support other, unrelated ventures. Naturally, this will affect the prices. It's a complicated equation.
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.
I hope this helps take some of the mystery out of the FOREX market. - 22871
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.
No comments:
Post a Comment