If you want to succeed in the foreign exchange market, it is important to know why forex rates change. Many factors are responsible for the change and gaining awareness about them can enable you to time your trade in an effective manner. This can help you make consistent profits on your investments.
As different pairs of currencies are freely traded in the forex market, you may be able to see frequent price fluctuations. These fluctuations happen due to various reasons including economic and political news and events. Most experienced traders make use of these fluctuations to make regular profits.
Factors that affect forex rates
One of the most important factors that affect forex rates is inflation rate. When the inflation rate of a currency is high its currency is undervalued, as investors may not be willing to invest in that country. When the inflation rate is low it attracts investors to invest and this helps increase the exchange rate.
Interest rates that are determined by the central banks of a country also play a pivotal role in causing price movement of currencies. When the interest rates are high investors may be able to get a better return on their investments and this can increase the value of the currency.
Current account deficits are also an important factor that affects foreign exchange rates. If the current account is in a deficit it means that the country has to borrow money to finance its projects and this can result in a decrease in the value of a currency. Large public debts can often lead to high inflation. This can reduce the valuation of the currency and investors may not be interested in investing in the currency.
Terms of trade can also have a bearing on the forex rates. The terms of trade are said to be positive if the country has more exports than imports. However, if the imports are more than the exports then it affects the currency of the country. Economic growth and political stability are factors that affect the exchange rates. Employment rate and gross domestic price should also be followed closely by traders.
Determining forex rates
The laws of demand and supply determine the value of a currency. The cost of the currency goes up if more traders want a particular currency and similarly the value goes down if there is a decrease in the demand of a currency.
Similar to how traders buy and sell stocks and commodities, you may be able to increase your success rate and reduce your losses if you do adequate research before you choose the currency pairs to trade. Although there are hundreds of currency pairs that are available for trade you should only trade those currencies that are actively traded and popular.
When you choose active and popularly traded currencies you may be able to make profit even if there is a small positive movement in the forex market. You may also be able to minimise your losses too if you make a good choice of currency pairs to trade.
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