Currency Pricing – How Does it Work?
FX Economics 101
What exactly determines currency pricing? The answer is simple, supply and demand. When the demand of a currency is high, the price decreases. When the supply of a currency is low, price increases.
Although this is basic economics, figuring out the many factors that cause changes within higher or lower rates of demand and supply are not so straight forward. Those factors tend to fall into two categories; trade and capital flows. Why should we care? Because understanding just a few principles can you help you make money while trading forex.
Significance of Economic Indicators
Trade flows are anything that involve money moving into and out of a country as a result of the global commerce of goods and services. Countries that rely heavily on imports, generally have weaker currencies. On the other hand, countries that rely heavily on exports tend to have stronger currency pricing. So why do we care? Because there are many things that can affect this balance of goods and services between countries which sooner or later also affect currency pairs, which is important when trading forex and making money ! Therefore, forex traders that rely more on fundamental theory pay close attention to all types of economic data. This includes the interest rate, the deficit or surplus of a given country, the unemployment rate, as well as import and export figures. In addition, statements by fed officials and geo-political events can have a big impact on currency traders’ decision making just as it does in equity or stock markets.
What else can effect Pricing?
Capital flow is defined as the currency movement that occurs between countries as a result of investment. This includes money flowing into and out of the stock and bond markets, money exchanged due to real estate purchases, and money exchanged for international mergers and acquisitions. Just like the amount of goods and services flowing between countries can affect currency rates, the amount money flowing between countries can too. A flood of demand for local dollars due to an interest rate increase in bonds or a mega acquisition from a foreign multinational corporation can temporarily affect currency pricing ( and ultimately currency pairs ) as well.
How Fundamental Forex Traders Make Money
Pouncing on these specific currency pricing fluctuations between countries, or ultimately the PIPS within currency quotes on a given day is what can make you rich. Historically speaking, the news of economic indicators has been known to cause immediate price fluctuations as soon as the announcements are made to the public. Traditionally, economic news is announced at specific times of the day and month, which means traders can generally predict when the best time to take advantage of price movement. Analyzing what will happen to the supply and demand of one currency in relation to another based on overall trade and capital flow is what makes currency trading so challenging; however profiting off it can be very rewarding.
Trading in the Foreign Exchange Market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the Forex market. Don’t trade with money you can’t afford to lose.
