First , forex trading, like any speculation form, has one very important goal that lies above all else ; bring in money! If this is the premise we start out with, that making money is our goal , how is this achieved in our massive global market?
First, figure out whether you're a fundamental or technical trader, or perhapse both . Later we'll have more articles on this topic , but we'll assume for now that you keep track of current events and world affairs and are therefore attracted to the fundamental side of the game . Then you have to ask, what are the most important factors fundamentally driving currency movement ?
If focusing on the fundamentals , one main thing is going to drive the decisions you make in forex trading; differentials in interest rates between countries . What is an interest rate differential ? Great question ! Suppose there is a short term interest rate of 4% on the Australian Dollar . Meaning that if you are a debtor and you live in Australia this base rate helps to determine what you pay on your home mortgage, your credit cards, etc . If you're a creditor you can use as the base rate this 4% short term interest rate that will determine how much interest income you make on your investments ; such as CDs from your local bank . Now let's suppose the US Dollar has a short term interest rate , set by the Federal Reserve , at 1% . How does all I've just said affect the movements of currency?
If 4% is the short term rate of the Australian Dollar and the short term rate of the US Dollar is 1% it's all as simple as this : investors want their investments to have a higher yield and since there is more interest in Australia funds are then moved by them to the land "Down Under" . This shift in the investments going to Australia from the US mean that the US Dollar will weaken because the supply suddenly becomes greater than the demand and this strengthens the Australian Dollar since the demand is greater than its supply. Basic economic fundamentals at work here ; where there is more demand for something its value will rise .
Next time you think about your forex trading and what position to put on next , just ask yourself , "what country is likely to have higher rates moving forward and which country moving forward will probably have lower rates ?" Then buy currency that is the favorite for higher interest rates and currency favored for lower interest rates should be sold and see profits increase as investors go towards stronger currency and leave the weaker one . This is the essence of forex trading.
First, figure out whether you're a fundamental or technical trader, or perhapse both . Later we'll have more articles on this topic , but we'll assume for now that you keep track of current events and world affairs and are therefore attracted to the fundamental side of the game . Then you have to ask, what are the most important factors fundamentally driving currency movement ?
If focusing on the fundamentals , one main thing is going to drive the decisions you make in forex trading; differentials in interest rates between countries . What is an interest rate differential ? Great question ! Suppose there is a short term interest rate of 4% on the Australian Dollar . Meaning that if you are a debtor and you live in Australia this base rate helps to determine what you pay on your home mortgage, your credit cards, etc . If you're a creditor you can use as the base rate this 4% short term interest rate that will determine how much interest income you make on your investments ; such as CDs from your local bank . Now let's suppose the US Dollar has a short term interest rate , set by the Federal Reserve , at 1% . How does all I've just said affect the movements of currency?
If 4% is the short term rate of the Australian Dollar and the short term rate of the US Dollar is 1% it's all as simple as this : investors want their investments to have a higher yield and since there is more interest in Australia funds are then moved by them to the land "Down Under" . This shift in the investments going to Australia from the US mean that the US Dollar will weaken because the supply suddenly becomes greater than the demand and this strengthens the Australian Dollar since the demand is greater than its supply. Basic economic fundamentals at work here ; where there is more demand for something its value will rise .
Next time you think about your forex trading and what position to put on next , just ask yourself , "what country is likely to have higher rates moving forward and which country moving forward will probably have lower rates ?" Then buy currency that is the favorite for higher interest rates and currency favored for lower interest rates should be sold and see profits increase as investors go towards stronger currency and leave the weaker one . This is the essence of forex trading.
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