This article explains the importance of forex rates in foreign exchange trading and some of the factors that affect it.
Forex traders look to make profits from the buying and selling of foreign currencies in the foreign exchange market. Currencies from all over the world with different values are listed for trading in the forex market. The currencies are exchanged based on forex rates, which indicate ratio of the values of two currencies in a currency pair. The values of currencies keep changing with each passing minute, hour or day and these changes are also reflected in the forex rates. Forex traders have to keep watching the foreign exchange rate so that they know how to trade.
There are several players in the forex market including central banks, large commercial banks, investment companies, hedge funds, multinational corporations, governments and thousands of individual traders. The large banks and financial institutions trade in large volumes of currencies and are thus able to determine their own forex rates. Other forex trading companies and websites compete to offer attractive forex rates so as to attract clients. The rates are usually displayed openly on any serious website that deals with forex trading.
Types of forex rates
In many cases, forex rates are given in two forms – one for the buying price and the other for the selling price. The difference between the two is referred to as the spread. It is from these spread that forex brokers make their money in addition to other commissions they may charge. There is the option of trading using fixed spreads or variable spreads. Many new traders opt for forex brokers with fixed spreads since they know how much it is going to cost them for each trade regardless of how it goes. As for the variable spreads, it will all depend on the outcome of your trades. In general, wide spreads favour forex brokers while tight spreads work to the advantage of forex traders.
Values for forex rates are given up to the fourth decimal point. The smallest change at this level is referred to as a pip in foreign exchange trading. During trading, gains and losses are counted in terms of pips as the values rise or fall respectively. During most times, the markets are relatively quiet and price movements are small as reflected by the pips. However, these changes can translate into huge profits or losses depending on the amounts being traded. The changes can also signify the continuation or reversal of a trend. From time to time, the forex market gets volatile and big changes occur in the forex rates in terms of pips. Forex traders can make a quick killing during these times if they correctly anticipate the changes and trade accordingly.
Factors influencing forex rates
In order to predict coming changes in the forex rates correctly, you must understand how the forex market works. There are factors that affect currency prices and the forex market in general. These factors are mostly related to economic performance. In general, a country whose economy is performing strongly will have a strong currency in the forex market and vice versa. Factors influencing a country’s economy will influence the value of its currency in the forex market and perhaps other currencies as well.
News affecting currency values and the forex market in general is considered to be forex news. Such news touches on economic issues like non-farm payrolls, inflation, interest rates, trade balances and so on. Whenever such news is about to be released, changes start being seen in the forex rates as traders speculate on how the news is about to go. Many rumours also spread around this time and traders respond by trading out of fear. This causes significant changes in forex rates therefore you must watch the markets keenly during such times.
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