Currency Trading

Once only open to large hedge funds and highly wealthy individuals, the foreign currency exchange market has become easily accessible to individual currency traders due to the growth of internet trading and the introduction of regulatory oversight. In this exciting 24-hour market, traders can take advantage of trading opportunities at any time of day since trading is not limited to business hours.

Foreign currency exchange traders buy and sell currencies with the hope of making a profit when the value of the currencies changes in their favor, whether from market news or world events.

Why do Prices Change in the Foreign Currency Exchange Market? - Money is a medium of exchange and a standard of value – in other words, a way to quantify how much something is worth. Foreign currency exchange simply means exchanging the currency of one country for an equivalent amount of the currency of another. Foreign exchange rates are not static, but change dynamically-sometimes many times within a single minute.

Why does it take more dollars to buy a euro this week than it did last week? – Why would it cost you more today to buy a cup of coffee in another country than it did before, even though the price has remained the same there? The answer has to do with the value of a country’s foreign currency exchange relative to the price of another currency.

What Determines the Rate or Value of a Currency in Foreign Currency Exchange Markets? – Currencies, just like any other commodity that can be bought or sold, are subject to the laws of supply and demand. When more people want a particular currency, the cost of the currency in terms of other currencies will go up. When demand decreases or people do not want to hold a country’s currency, the value will go down.

International Trade and Investment and Foreign Currency Exchange – One factor that directly affects foreign currency exchange markets and demands for a particular currency is international trade. For instance, if I buy a Japanese car in the US, I give dollars to my dealer, who gave dollars to his distributor, and so on. But before the profits are banked by the carmaker in Japan, they are converted into Yen. If there is a surge of buying of Japanese cars in any given month, the result is going to be increased demand for Yen-which will in turn will cause an appreciation in the Yen’s value vis-à-vis the US dollar.

Interest rates can also affect the prices in the foreign currency exchange markets – Suppose you are reading about the economic situation in the UK and see that the market is expecting the Bank of England to raise interest rates over the next few months. This means that investments in the UK will now pay out higher returns. To take advantage of this situation, you would buy the GBP/USD pair and hold it until it appreciates – thus increasing demand for and the value of the pound vis-à-vis the US dollar.