This article looks at the methods of trading on the forex live market with alternative currency pairs.
The forex live market is known to be one of the most lucrative trading markets worldwide; however, it also known to be the most volatile and high risk. In order to survive in this forex industry you must develop risk awareness and risk management. Furthermore, you must also be aware of currency price movements and why these movements occur. This can be learned from forex training, but is best learned from watching and talking to experienced traders.
One of the main reason traders with full-time jobs are attracted to the market is the 24 hour operating timeframe. Some are interested because the tight major currency spreads show that not much movement is required for the trade to be profitable. There are also simple monetary methods that act as motivators which will cause traders to look beyond these major currencies. This has caused an interest in trading in the Asian session as this market carries higher interest rates.
Alternative pairs on the forex live market
New traders are advised to begin trading with major currency pairs. This is not only because there is more information available on these pairs, but also because the spreads are tighter and easier to trade. If one chooses to move away from these major currency pairs, you will find that the spreads begin widening. Many investors who step away from the popular currencies will incur negative interest rates.
The interest rates of alternate pairs
If a country presents with a negative interest rate it will cause your currency to devalue as the money held in deposits are below the chosen currency’s country inflation rate. For example, the UK’s ISA rates are generally around 3%, while the inflation rate is far above 5%. The base rate is approximately 0.5%, while in Australia the interest rates are approximately 4.5%. In order to take advantage of this high Australian interest rate, investors usually choose to invest funds in Australia. This is due to the investor hoping the Australian dollar will appreciate the pound.
The interest rate differential is triggered by the decline in the value of the GBP to the AUD. Evidence shows that over a two year period the GBP has dropped by 25%. The investors who move to the alternative currency market during the two year period will have both gained on interest on their funds, but also gained on the appreciation of the currency.
Trading on the forex live market carries a great deal of risk and is particularly high when looking at differentials in interest rates. When looking at the AUD, investors have taken the risk and purchased the currency; however, they will place it fixed deposit rate and earn on the interest rate set at the time of purchase. To offset this, the investors who sold the GBP and went ahead to borrow GBP which funded their overdraft facility at an interest rate that was lower for the same period. This lead to a profitable deal as they earned a higher level of interest while paying a lower level of interest.
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