Understanding What Forex Trading Is All About

Understanding What Forex Trading Is All About

First , forex trading, like other speculation forms , has one main goal; bring in money! So if we start with that premise , that making money is our goal , then in a massive global market market, how do we do this ?

First you must decide whether you're a fundamental or technical trader, or perhapse both . Later we'll have more articles on this topic , but now let's just assume you like keeping up with current events and world affairs and you are more attracted to fundamental trading . Then you have to ask, what are the single most important fundamental factors that drive currency movements ?

If the fundamentals is what you're focusing on , there is one thing above all else that will drive your forex trading decisions ; the interest rate differentials between various countries. What exactly is an interest rate differential ? Great question ! Imagine that the Australian Dollar has a 4% short term interest rate. Meaning that if you are a debtor and you live in Australia this base rate helps to determine what you pay on credit cards, mortgages, and more . This also means that if you are a creditor you can use this 4% short term interest rate as your base rate that decides how much your investments make; such as CDs from your local bank . Then suppose that the short term interest rate of the US Dollar, which the Federal Reserve sets , at 1% . How are currency movements affected by all this ?

If 4% is the short term rate of the Australian Dollar and the US Dollar short term rate is at 1% it's all as simple as this : a higher yield is sought by investors and since Australia provides more interest they move their funds "down-under" or as the Aussies say, "down-unda mate" . This shift in investments of capital flows leaving the US and going to Australia mean that the US Dollar will weaken because supply is larger than demand and the Australian Dollar will strengthen because supply is smaller than demand . The basics of economic fundamentals are working; where there is more demand for something its value will rise .

When you think about your own forex trading and your next position, just ask yourself , " what country has the most liklihood of having higher rates moving forward and what country is likely to have lower rates moving forward ?" Purchase currency that is the high interest rate favorite and currency favored for lower interest rates should be sold and increase profits as investors go towards stronger currency and leave the weaker one . This is the essence of forex trading.

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