Forex Tips

Investing in foreign exchange (forex) is a daunting step for neophytes who do not know the layout or the rules. Forex is a vast world of hypersensitive instruments called exchange rates, which represent the price of one currency in terms of another. Traders have to contend not only with their fellow traders, but also with such mighty institutions as central banks and international corporations as well as the humble tourist trying to get his hands on some foreign cash. Investing in forex takes courage and the discipline to avoid emotionality. Sticking to the facts enables a trader or investor to surf the waves without getting wiped out.

Try A Demo First

New investors have a plethora of trading platforms to investigate and try out. Putting up any real capital at this stage is dangerous for investors because they can sustain serious losses if they are unfamiliar with the platform. Fortunately, most brokers offer “demo accounts,” which are accounts that use fake capital. Investors and traders can use forex demo accounts to make trades and take imaginary profits and losses. Demo accounts allow investors to get their feet wet without risking any of their own money. After they have gained experience with the seemingly chaotic ups and downs, they can start trading with a real account.

Use Indicators

Using economic and market indicators such as bond spreads, inflation rates, interest rates and Gross Domestic Product (GDP) growth rates give an investor a solid basis on which to base a trade. A particularly interesting indicator is the spread between the yields on government bonds from different countries. The yield spread between foreign and domestic government bonds of comparable maturities can strongly influence exchange rates. This often translates into what a country’s central bank decides to with interest rates, since central banks can almost dictate the yields on government bonds through open market operations.

Use Commodities

The commodity cycle plays a key role in the currency valuations of many countries. Heavy commodity exporters like Australia have close correlations between their currencies and the prices of the commodities they export. Gold and the Australian dollar, for example, have historically had a tight correlation because Australia is a major gold producer. Canada, on the other hand, is a major exporter of oil, and the Canadian dollar tends to appreciate when the price of oil is rising. Norway is also a major oil exporter, and the Norwegian krone does well when oil prices are high. Investors can take advantage by buying the Canadian dollar and the Norwegian krone when oil prices rise.

Watch Out For Central Banks

These behemoths are the movers and shakers in the forex market. A central bank intervention can destroy the positions of unwary traders. Forex investors must watch the central banks of the currencies they have money on like hawks. Any hint of raising or lowering interest rates is instantly communicated around the forex world, which increases the level of volatility significantly. Central banks can suddenly shift in response to unexpected events like natural disasters.

 

More tips? Contact Lucror FX today!

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