Foreign Exchange Trading Demystified

Dec 12 09:59 2007 Damian Papworth Print This Article

There is a lot of mystique about foreign exchange trading.  And probably rightly so too, it is afterall one of the riskiest financial markets you can trade in. 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.

Firstly,Guest Posting 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 definately 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. 

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.

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 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.

Currency prices are a measure of one countries “economic value” as compared against another countries “economic value”.  If you think about the myriad of factors which impact people’s perceptions of the economy of the country you live in, you can start to understand why predicting FX price movements is difficult.  But your countrieseconomy 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 countries economy also.  And 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.

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 of which can impact the price.  There are even people who buy currencies months and years in advance to lock in a price, to help support business activities unrelated to FX trading.  This also impacts price.  So you can start to see what a complex equation this can become.

Fortunately, we have reviewed a FX trading strategywhich doesn’t need  to predict if a currency is going to go up or down.  It doesn’t care which way the traded currencies move, it makes money in both directions. It certainly has saved me many headaches, I just follow the strategy and make money week in and week out and watch my trading account balance go up every month.  Read our review it the following link and see what you think: Currency Trading Strategy Reviewed  It is certainly worth setting up a demo account and trialling without putting any money down. 

I hope this helps take the mystery out of the FOREX market.  If you would like more information, do not hesitate in contacting us at

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Damian Papworth
Damian Papworth

Damian Papworth, B.Ec. A.S.I.A. is the owner and editor of the only wealth creation website that promises you every strategy listed on it, is being actively used successfully by the team today.

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