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.
Part of the confusion surrounding the FX market is the fluctuation of currency. As with the price of most items on indices, supply versus demand factors heavily in the equation. As a certain currency is wanted and demanded on the market, the price will rise, as sellers realize they have something with which to bargain. Buyers are willing to pay more, supporting the whole transaction. On the other hand, as a currency ends up heavy on the supply end, anyone wishing to dump it will have to accept a lower price. This part of currency exchange makes sense when you stop to consider it.
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.
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.
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.
There are also Foreign Exchange Trading strategies and these don't necessarily depend on rising or falling prices. No matter how the currencies are moving, the investor will make a small profit, as the currency inches in either direction.
Hopefully, this explanation of various factors affecting the Foreign Exchange market has served to illuminate the subject.
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.
Part of the confusion surrounding the FX market is the fluctuation of currency. As with the price of most items on indices, supply versus demand factors heavily in the equation. As a certain currency is wanted and demanded on the market, the price will rise, as sellers realize they have something with which to bargain. Buyers are willing to pay more, supporting the whole transaction. On the other hand, as a currency ends up heavy on the supply end, anyone wishing to dump it will have to accept a lower price. This part of currency exchange makes sense when you stop to consider it.
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.
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.
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.
There are also Foreign Exchange Trading strategies and these don't necessarily depend on rising or falling prices. No matter how the currencies are moving, the investor will make a small profit, as the currency inches in either direction.
Hopefully, this explanation of various factors affecting the Foreign Exchange market has served to illuminate the subject.
About the Author:
If you are bored of your mutual fund investment, Damian Papworth suggests FOREX trading. The excitement and possible returns are unparalleled. Click here to get your own unique version of this article with free reprint rights.
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