In the foreign exchange market, considered the biggest market in the world, the exchange rates of the various foreign currencies traded within it comprise the backbone of the forex market. Legions of traders make their livelihood out of the various movements of foreign exchange rates in the market. They make a profit from buying at a lower price and selling at a higher rate depending on when the rates of these currencies rise or fall.
These currency prices, also known as forex rates, are an indicator of the supply and demand for the different currencies around the world. It determined by the general strength of an economy and prevailing interest rates. The economic state of a country is reflected by its GDP, foreign investment rates and trade balance, particularly its international trade level and interest rates. Based on these factors, the strength and weakness of a particular currency determines its Forex rate.
A Forex rate is the resulting rate from which two foreign currencies are pitted side by side according to their value. Knowing the fundamentals of how the Forex exchange works makes for a better comprehension of how certain it come about. In this manner, the value of currencies can be used as a ratio with which to measure how many units of one currency can be purchased with a single unit of another. For instance, how many US dollars can be purchased in Indonesian rupiah?
Through the exchange of various currencies, traders are able to make a profit. The foreign exchange market is one of the most volatile markets ever known. The rates move at the rate of every hour and a trader who buys a currency that may be worth a single US dollar may be able to sell it at 2 US dollars an hour later, thereby making a profit within a short span of time.
In order to utilize forex values, a trader will need to compare two currencies at any one time. Based on International trade, particularly in the imports and exports sector, the trade balance and forex rate of a country are determined. A country that imports more products compared to its international exports displays a trade balance deficit. Having a lower deficit in relation to the average level in the foreign exchange market will result in a downward movement of the currency prices and forex rates of this particular country. If the deficit is not as great as expected, the forex rate of the country generally strengthens in a positive upward movement in terms of price.
Interest rates also play a role in the movement of a country’s forex rates. A country that has higher interest rates will also have a stronger forex rate. This is because other global investors tend to move their investments into this country to gain a bigger return of investments. Conversely, the lower a country’s interest rates are, the lower their forex rates are likely to be.
Traders who are looking to gain a lot of wealth from investing in the foreign exchange market will need to develop a sound system in order to understand how it come about in relation to how the market moves. This will enable them to track their investments and make lots of money on a day to day basis.