As the currency’s value changes so does the profit or loss you make
Trying to track the reasons behind the rise and fall of a currency — and trying to predict whether it will rise or fall in the future — isn’t easy. But there are a number of factors that you can depend on to determine the value of a currency.
When you’re just starting to trade in forex, it’s important to understand those factors.
Perhaps the most important factor is demand for the currency. Demand for a country’s currency rises when: exports rise (and foreign currency flows in which needs to be converted by the exporters); the country receives foreign investment; or when the central bank or speculators buy currency.
All of these things push up the price of that currency on forex markets.
The supply of a currency is also important, of course. Supply falls when: goods or services are imported (and the currency is exported); investment capital flows out of the country; or when central banks or speculators sell the currency.
When any of these things happen, the price of the currency rises on forex markets.
In addition to supply and demand, a rise in interest rates can also increase the value of a currency (while a fall in interest rates can cause a currency to drop.)
Economic growth also affects the value of a currency on forex markets. Countries experiencing strong export growth — and that show signs that their exports will continue — are likely to enjoy high currency values. Weak economies — or economies that are perceived by forex traders to be weak — will suffer from low currency values.
A growing economy though, might suffer from rising inflation. That can cause exports to fall, reducing demand for the country’s currency and increasing imports. Both of those can cause the currency to drop in the forex markets.
The state of a country’s economy is often revealed, at least in part, by its balance of payments. A country that exports more than it imports will see a large demand for its currency, and therefore a high price. A country that imports more than it exports will see its currency fall.
And finally, speculators can cause a currency to rise and fall too when the trades are large enough. When you’re starting to trade forex, it’s unlikely that your forex trades will be large enough to do this!
See how this works in practice at paddypowertrader.com