Currency Trading Explained

When on holiday in a nation which does not accept the localized currency

Currency Trading Explained

 

When on holiday in a nation which does not accept the localized currency of the nation which you come from, one of the initial steps to take is to exchange the two currencies, for each other. When such exchanges occur, usually through a bank/exchange house/other, a Forex (Foreign Exchange) transaction is made.

 

Trading the Forex Markets

Forex trading is when traders buy and sell currencies with the aim of making money with regards to the differences between the two currencies. Currency A is bought versus currency B, in the belief that the price of A will rise against that of B’s after some time. If the currency does indeed increase in value, the trader will sell it back, in order to take profits. However, if the currency in question decreases in value, then, in this case, the trader will make a loss.

 

When Forex is traded on a platform, then the trades are read as if they were OTC or ( Over The Counter) transactions. This means that speculation is on the movement of currencies, rather than against each other; this does not mean that physical ownership is actually taken for an actual asset (in the case of this instance, Money). The trader only takes the result of the difference in pair or currency, in profit, as well as loss.

 

Why Currencies Matter?

The Forex market is the largest financial market in the world, currently, and compromises more than $5 trillion per day on average in transactions, as it spans currency trading activity in carious exchanges, institutions, and banks all over the world. At this rate, it dwarfs even the major stock markets such as the NYSE (New York Stock Exchange), LSE (London Stock Exchange) and the TSE (Tokyo Stock Exchange) combined.

The exchange rate is one of the most important means of indicating a nations’ well-being, economically. High rates of exchange may mean that the nation in question could import, or buy goods and services easily, whereas a low rate of exchange means that selling and exporting is difficult.

 

This is the reason that central banks monetary policies are often working to get a good balance on their rates.

 

What Makes Currency Rates Fluctuate?

A number of factors affect the value of a countries’ currency in relation to other currencies. The importance and weight of any of the below-mentioned factors at random may shift and should be considered in combination.

 

Inflation 

Generally, the lower a country’s inflation, the higher its currency’s exchange rate.

 

Interest Rates 

Central banks may manipulate interest rates to manipulate their currency’s value. A higher rate of interest brings in foreign investment raising the exchange rate and vice versa.

 

Trade

The ratio of export vs import prices leads to the balance of payments. Higher exports (than imports) means the country’s goods are in demand leading to an increase in their currency which is needed to pay for their good.

 

Political Stability

Foreign investors look for stable countries to invest in. This leads to greater demand for their currency.

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