Are you investing in the forex market? Not sure or yes. You all are investing in the market without even knowing it. When you travel overseas, you need the local currency that you get in exchange for your currency. Every time you travel overseas, you are actually participating in the forex market.
Ultra Ltd., the best back office solutions provider and leading forex suppliers is sharing some basic concepts related to forex market so that you can also get the advantage of the forex market even if you are a not daily trader.
1. Eight Majors
All the forex market is centralized around the eight major economies of the world. This is what makes forex market comparatively easy to stock markets with thousands of stocks. These countries are considered largest and most sophisticated financial markets in the world. You can invest in the currency of following countries after determining the best undervalued or overvalued opportunities.
- United States
- Eurozone (important are Germany, France, Italy and Spain)
- United Kingdom
- New Zealand
The above countries release economic data almost on a daily basis that allow investors to assess its economies and stay on top of the game.
2. Yield and Return
Yield drives return- the key thing to remember in trading currencies. The currencies of forex market are quoted in pairs because you buy and sell two underlying currencies here. If the EUR/USD pair is quoted as 1.3500; you will need $1.35 to purchase one euro.
Every time you buy one currency, you have to sell another in every forex transaction. The central bank of the respective countries set an interest rate on the currency. So, when you sell a currency you are obliged to pay the interest on the currency, but you’ll also earn the interest on the currency that you have bought.
3. Leveraging Returns
Leverage in the forex market is high as 100:1. It means that if your capital is $100, you can control the assets worth $10,000. Many investors termed ‘Leverage’ as a double-edged sword. The reason being is it can generate massive profits, but one wrong decision can cost you with huge losses.
4. Carry Trades
A term ‘Carry trade,’ a popular trading strategy, came into existence due to the dynamic quality of currency values. Carry traders earn from the difference in interest rate between two currencies and the when the value of currency appreciate.
5. Carry Trade Success
The direction of the spread is far important than the absolute spread in the carry trade. Pairing up the currency of highest interest rate with the currency of the lowest rate is not going to generate profits for you anymore. If you want carry trades to work best for you, then you should go with the currency of an interest rate that is in the processes of expanding against a currency with a stationary or contracting interest rate.
6. Getting to Know Interest Rates
Mostly forex traders generate profit from the difference in interest rates. But one requires a good understanding of the country’s economic and politics to know where interest rates are heading.
In general, a country that is witnessing increasing inflation and strong growth rates will probably raise interest rates to bring down inflation and control growth. Vice-versa, the economic slowdown countries will reduce the interest rates.