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Forex Rates - What are Forex rates?
Forex rates simply refer to what the going market rate is for a specific forex
currency pair. You have already learned about forex spreads and pips, and the
forex rate is simply what the spread is on a given currency pair at the present
time. For example, if the current rate for USD/CAD is 1.1877, then in order to
buy 1 US dollar you will need to pay 1.1877 dollars in Canadian currency. If you
bought the USD/CAD currency pair at 1/1.1877 and the US dollar went up to
1/1.1892 over the next 48 hours, you would have made a profit of 15 pips.
 Just
like the stock market, forex rates change continually throughout the day, even
by the minute or second. This might make you wonder if you need to stay home by
your computer in order to trade forex.
Luckily, the same technology that allows regular people like us to trade forex
allows us to automate our forex trading in case we're not around to monitor
changing market conditions. You never need to worry about being on your computer
at just the right time to place a buy or sell order.
All forex brokers use various forex platforms which let you set pre-determined
prices for the broker to sell your position and realize your profit, or set a
stop-loss to cash out if your currency falls and you want to minimize your
losses. These forex platforms are essentially just different interfaces which
allow you to conduct your forex trades, place buy/sell orders, and set specified
points and stop-loss orders to ensure timely profits and reduced losses.
As we've mentioned, forex rates change constantly and as a forex trader you'll
want to stay current on the market forex rates as much as possible. This is
quite easy to do as most forex brokers have various systems in place to supply
you with updated forex rate information via phone, e-mail, text messages and
other convenient sources.
Forex rates - who sets them?
Many people wonder how the forex rates are determined for various currency
pairs. Currencies, just like any other commodity that can be bought or sold, are subject to the laws of supply and demand. When more people want a particular currency, the cost of the currency in terms of other currencies will go up. When demand decreases or people do not want to hold a country's currency, the value will go down.
One factor that directly affects demand for a currency is international trade. For instance, if I buy a Japanese car in the US, I give dollars to my dealer, who gave dollars to his distributor, and so on. But before the profits are banked by the carmaker in Japan, they are converted into Yen.
If there is a surge of buying Japanese cars this month, the result is going to be increased demand for
Yen - which will in turn cause an appreciation in the Yen's value.
When deciding to invest, international investors monitor the health of an economy similar to the way that stock traders analyze
the companies they wish to invest in. If a country's economic outlook improves, there will be a surge of interest and international
investors will move money into the economy and thus drive up the value of its currency. Because of this, currency traders pay
close attention to indicators that follow the health of an economy.
Significant indicators that investors and traders watch include GDP, interest rates, and the employment rate.
A country's political outlook will also affect how attractive it is to investors.
Currency traders monitor all of these elements and form a big-picture understanding of an
economy so that they can understand the value of its currency.
The underlying principles behind trading forex are the same whether you are a
huge financial institution buying tens of millions of dollars, or simply an
individual forex trader working from home with a $250 deposit in your account.
The secret to successful forex trading is understanding what market conditions
precede a currency's ascent or descent, and using that knowledge to act at the
right time.
Forex rates - Up or Down.
Forex trading is similar to buying stocks in some regards. However, the one
key difference that any beginner should realize, is that with forex you can make
money whether a currency is going up or down, as long as you are on the right
side of the equation. With stocks you always buy a stock and hope it goes up. In
forex you can make just as much money by having a currency go down, if you
correctly predicted beforehand that the currency was due to decline.
Aside from the potential of huge profits, the thing that most forex traders find
so exciting with forex is that it doesn't matter what state the economy is in,
or which way a currency is heading - or anything else - there is always someone
making money in the forex market. Whether a certain currency is going up or down
is irrelevant - the only thing that matters is knowing what side to be on.
Trying to determine if market conditions dictate that a currency will go up or
down is not always an easy task. In actual fact one of the main factors that
determines global forex rates is simply supply and demand.
However, within that model, there are many different factors which determine if
a country's currency will be in demand or not. This includes things like
political stability, unemployment, interest rates, productivity, and whether the
economy is weakening or strengthening.
Learning how these factors above will affect a given currency is really the
whole secret to trading forex. And every forex trader will also tell you that
sometimes a currency will increase or decrease despite what these indicators
would suggest, and the currency will move in a certain direction defying
conventional logic. Simply put, sometimes a little bit of luck and blind faith
are involved in forex trading, like anything else.
Now that you are developing a working knowledge of forex currency exchange like
forex spreads, pips, currency pairs, and forex rates, chance are that the forex
picture is becoming more clear, and you're starting to truly understand how
forex trading works.
It's also probably safe to say that you're starting to see
why so many people find forex so exciting, and thinking you'd like to start
trying it firsthand. Keep reading and you'll see how you can begin your own
journey into forex trading by opening a free forex demo account, and
experiencing the thrill of forex trading - but with pretend money!
Next: Free Forex demos
 
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