In the first place, forex trade signals, like any form of speculation , has a goal that is more important than anything else ; bring in money! So if we start with that premise , that our goal is to make money , then how do we do it in this massive global market ?
The first thing you need to decide is whether you’re a fundamental or technical trader, or perhapse both . Later we’ll have more articles on this topic , but now let’s just assume you like keeping up with current events and world affairs and you are more attracted to fundamental trading . Then you have to ask, what fundamental factors are the most important driving the currency movements ?
If focusing on the fundamentals , there is one thing above all else that will drive your forex trading decisions ; differentials in interest rates between countries . What is an interest rate differential ? That is a very good question! Suppose there is a short term interest rate of 4% on the Australian Dollar . This means that if you live in Australia and you’re in debt this base rate helps to determine what you pay on mortgages, credit, and other debt. If you’re a creditor you can use as the base rate this 4% short term interest rate that determines the income you get on investments ; such as CDs from your local bank . Then imagine that the US Dollar has its short term interest rate , set by the Federal Reserve , which is 1%. So how in the world does what I just said affect currency movements ?
If the Australian Dollar short term rate is at 4% and the short term rate of the US Dollar is 1% it comes down to something really as simple as this : a higher yield is sought by investors and since Australia provides more interest funds are then moved by them to the land “Down Under” . This shift in the investments going to Australia from the US weakens the US Dollar since demand is smaller than supply and the Australian Dollar will strengthen because supply is smaller than demand . Basic economic fundamentals at work here ; when there is higher demand the value rises.
The next time you are thinking about your own forex trade signals and the next position to put on , just ask yourself , ” which country will moving forward have higher rates and what country probably will have the lower rates moving forward?” Then buy currency that is the favorite for higher interest rates and sell the currency that you favor for weaker interest rates and watch your profits grow as investors leave currency that is weaker and go towards the one that is stronger. This is the essence of forex trade signals.
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