Foreign Exchange Trading Demystified
There is a lot of mystique about foreign exchange trading. And probably rightly so too, it is after all one of the riskiest financial markets you can trade. In this article, we will take you through the reasons this market is so risky and hopefully to some extent, take the mystery out of the market.
To start, what does it mean to trade in Foreign Exchange markets? How does the process work and what do you use? Well, you use the different types of monetary units from around the world. Investors purchase money, or currency, from a country by selling the currency of another country. The transaction is so common and widespread that international business is impossible without it. You, too, have traded in the foreign exchange market, whether are aware of it or not.
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.
There is also the indirect method of trading in foreign currencies. If you are a lover of foreign cars or merchandise, they were originally sold to importers in that country's currency. Selling goods in a foreign country means the purchase in the country of origin (the purchaser having to exchange currency), with calculations made as to what that means locally, then determining the resale price in the country where it will be sold. At any point of the transaction, the FX Market was involved and so were you, indirectly. Exchanges like this one fuel the market, making purchasers, exporters and importers all players. It is an indirect form of participation, but without the exchange of currencies you would never see imported products.
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 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.
To figure out the value of a particular currency, one has to find the economic value of the country, comparing it against the stability and economic foundation of another. There are a staggering amount of factors that could affect the economy of any country, so bear that in mind. Sometimes, all logic seems to have been thrown out the window, while a mood or feeling of a people or investor group is overwhelming the trade. From a simple glance, one can see the difficulty of depending on this business to deliver clear results.
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.
Beyond these concerns, you'll have to gauge the economy and currency of the two countries in the scheme of the world economy. To determine if one country's currency will become more valuable over time, you need a lot of information and considerable foresight, as this is a complex equation.
And if you manage to get all your analysis correct, you then need to hope everyone else does too. Currencies can move on investors opinions, expectations met or expectations not met, global sentiments of what is likely to happen as much as global opinion of what has happened. There are fundamental traders (who look at information such as the above to make their decisions) and technical traders. (who just follow graphs and don't care why) Both trader groups can impact the price as they impact supply and demand.
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.
Then there are Foreign Exchange Trading Strategies which don't need to predict if a currency is going to go up or down. It doesn't matter which way the traded currencies move, they make small incremental profits in both directions.
Hopefully, this explanation of various factors affecting the Foreign Exchange market has served to illuminate the subject. - 23199
To start, what does it mean to trade in Foreign Exchange markets? How does the process work and what do you use? Well, you use the different types of monetary units from around the world. Investors purchase money, or currency, from a country by selling the currency of another country. The transaction is so common and widespread that international business is impossible without it. You, too, have traded in the foreign exchange market, whether are aware of it or not.
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.
There is also the indirect method of trading in foreign currencies. If you are a lover of foreign cars or merchandise, they were originally sold to importers in that country's currency. Selling goods in a foreign country means the purchase in the country of origin (the purchaser having to exchange currency), with calculations made as to what that means locally, then determining the resale price in the country where it will be sold. At any point of the transaction, the FX Market was involved and so were you, indirectly. Exchanges like this one fuel the market, making purchasers, exporters and importers all players. It is an indirect form of participation, but without the exchange of currencies you would never see imported products.
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 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.
To figure out the value of a particular currency, one has to find the economic value of the country, comparing it against the stability and economic foundation of another. There are a staggering amount of factors that could affect the economy of any country, so bear that in mind. Sometimes, all logic seems to have been thrown out the window, while a mood or feeling of a people or investor group is overwhelming the trade. From a simple glance, one can see the difficulty of depending on this business to deliver clear results.
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.
Beyond these concerns, you'll have to gauge the economy and currency of the two countries in the scheme of the world economy. To determine if one country's currency will become more valuable over time, you need a lot of information and considerable foresight, as this is a complex equation.
And if you manage to get all your analysis correct, you then need to hope everyone else does too. Currencies can move on investors opinions, expectations met or expectations not met, global sentiments of what is likely to happen as much as global opinion of what has happened. There are fundamental traders (who look at information such as the above to make their decisions) and technical traders. (who just follow graphs and don't care why) Both trader groups can impact the price as they impact supply and demand.
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.
Then there are Foreign Exchange Trading Strategies which don't need to predict if a currency is going to go up or down. It doesn't matter which way the traded currencies move, they make small incremental profits in both directions.
Hopefully, this explanation of various factors affecting the Foreign Exchange market has served to illuminate the subject. - 23199
About the Author:
If you are bored of your slow mutual fund investment, Damian Papworth recommends FOREX trading. The speed and possible rewards are hard to beat.
posted by X - Men @ 1:19 PM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home