Forex Trading – How It Works

It is in the nature of man to make speculations. Every individual tends to make speculations about the future. While some wonder what will be their future socially, economically, politically etc. Some are more inclined toward predicting the future of the humanity as a whole. But there are some, who actually want to gain out of making the right predictions. The game of chance and risk have been the favorite of mankind since ages. Similarly predictions in the foreign exchange have become a favorite pastime for individuals all around the world. Many individual even choose this as a full time career job. They obtain specialized financial degrees and experience for trading firm, in order to become successful forex traders. The rules of the game are simple, if you are able to guess the ups and downs of the currency market, you will make gain overnight depending on what you are willing to risk.

As the value of the currency depends on micro and macro economic variables, in the domestic and international market, predicting currency exchange rates can be a difficult task. It is important, to know social, economic and especially political changes taking place in regions. For example the political turmoil taking place in Iraq, makes Iraqi currency highly volatile. The currency value can go down in a very short span of time. Similarly if a new economic policy being adopted in Beijing is going to affect the economy of China positively, it can be said with some surety that Renminbi(Chinese currency) will appreciate in future. But the number of variables involved can make these predications risky.

A positive turn in the economy can be easily cancelled out by political problems. Even a single wrong policy by economists, sitting in the policy making seats, can totally devalue the currency of a nation. Scenarios can change in a matter of hours. Some developing nations have this quality of having volatile status-quo changes. The developed nations on the other hand can be termed less volatile in terms of foreign currency.

Domestic variables are not the only indicators to look on before investing in Forex markets. Some variable can affect the whole world economy. Many times the changes in oil prices have affected the economies of nations in all the continents.

Similarly proximity of changes taking place in the world order is a very sensitive issue to be considered. A change taking places thousands of miles can affect your currency rates. For example a war initiated in Asia, can have effects on the economy of western nations. This was the case for USA, when war was going on in Vietnam.

In order to make substantial profits in the Forex, it is important to play with a very large liquid equity. Forex trading is known to be more risky as compared to stocks. But the rewards can be equally higher. Usually it is safer ‘not to put all your eggs in one basket’. Trading in different currencies can balance out losses at times.

Hence in order to be a successful forex trader, one has to be fully informed about the world order and the changes taking place in it. Informed decisions are always better the than ones based on emotions and feelings.

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