You have the basic knowledge about pips and spreads. Now, let’s talk about exchange rates – those inform us about the size of the spread for a currency pair at a specific time. For example, if the exchange rate of USD / CAD is 1.1855, it means that for 1 US dollar you have to pay 1.1855 Canadian dollar. If we bought US dollar at exchange rate and afterwards the price of dollar rose to 1.1870 level, it would mean that our profit of 15 pips.
Just as it is in the stock market, exchange rates in the forex are constantly changing during the day, sometimes every minute, and sometimes even every second. This may raise the question of whether you need to be in the house to turn forex currencies? Fortunately, the same technology that allowed us access to the market, also allows us to automate the investment. You don’t have to worry about changes on market that occur when you’re away or sleeping – set up the relevant sale and purchase transactions as you see fit, and they will happen automatically once the needed criteria are met – you can basically walk away at any moment and come back once you have time.
All broker platforms allow you to determine in advance the specified values at which the broker will automatically sell, once the currency pair reaches the price that gives us profit that we want. Conversely, the platform also allows us to establish the lower limit, in the event that the currency depreciated. In this situation, the broker sells the currency if it’s value falls below certain point, in order not to bring us excessive losses.
I guarantee that knowing how to dramatically and quickly changes are happening in the market, you want to keep up with the information about your investments. And again, technology comes to meet the demand – most brokers have systems that give you wanted information by email, phone or SMS (for example automatic alerts if planned transaction goes thru once the price criteria has been met).
Who determines the exchange rate?
Many people wonder how exchange rates are determined for individual currency pairs. Currencies, like any other commodity or service that can be purchased, subject to the laws of supply and demand. If the demand for the currency among the people grows (more people want to buy it), its price rises relative to other currencies. If people do not want to own the currency or do not want to buy it, it’s price will fall.
One of the most important factors that have a direct impact on the demand for currency is international trade. For example, if you buy a Japanese car in France and pay for it in US dollars, The dealer pays for it to its distributor in US dollars etc. But before the money will go to the company that runs factories in Japan, it must be changed to the yen. This increases the demand for yen (of course the change is negligible compared to size of global economy, but by changing dollars to yen at the end of a month to realize profits of selling a few thousand cars, it can actually affect the USD/JPY pair).
Before any international investor decides to invest in a particular country, it examines its economy. If the economy of the country is stable, constantly evolving, offers favorable conditions for investors, it will increase interest in this country, investors will realize their projects there, and it will move to this country considerable amounts of capital, and this in turn will increase the value of the currency of the country . Therefore, currency investors should pay a lot of attention to all the information about the states of the economy of individual countries – particularly those countries whose currency they are trading ( It helps to follow different currencies as well, in order to spot potential new investment opportunities). This is another aspect, next to international trade, which you need to keep track of and draw the correct conclusions in order to succeed in the forex market.
Other factors that are equally important when assessing movements in the currency markets, are: the countries’ GDP, interest rates in the banking system, the level of unemployment, as well as the political situation in the country. Skillful analysis of these factors is the key to success. However, this requires a better knowledge of economics, but later on, I’ll try to present in a easy to understand way as well.
Basic principles of action in the forex, and therefore the analysis of these factors is the same for each participant in this market. It does not matter whether it is a major international bank, which buys tens of millions of dollars, or if it is a small investor like you and me, who begins having with only 100 or 200$.
Exchange rates – up or down?
To some extent, investing in forex is similar to playing the stock market. Everything comes down to how we evaluated the situation and if our judgment was correct. If market signals indicate that the rate of the currency will fall, and we anticipated that, we can earn good money, even at the drop of a given currency (the same way that investors profit off “bear market”).
In addition to the potential for huge profits, what is equally fascinating in forex, is the fact that regardless of the state of economy, or no matter if currency falls or drops, someone is always earning money – You just need to pick right side. Understanding the indications of the market does not always guarantee that the currency will gain in value or lose value, since it’s all about supply and demand determine the shape of market prices of currencies. Factors such as political stability, interest rates, productivity, etc., influence the currency but market’s psychology is just as important. Any experienced investor will admit that even after properly analyzing the signals sometimes a currency will behave quite contrary to the predictions – sometimes a bit of luck and intuition is needed to succeed as well.
After reading the previous information, Forex image should slowly emerge from behind the fog for you. You know the basics of how the forex functions and the rules that govern it. The only thing that remains is to decide whether or not to take the risk. If you are determined, remember that before you decide to invest your hard earned money, open a free practice account and check whether the forex trading is definitely for you. On the next page I’ll be describing the most reliable brokers who offer free training accounts.