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Trading Essay

860 words - 4 pages

When it comes to FX trading, traders have two sets of currencies that come in a pair. The fluctuations in the exchange rate between these two currencies are where a trader looks to make profit on the Exchange Market.
If trader believes that the foreign currency will appreciate against the USD, the trader’s profits will rise with every increase in the exchange price. However if the foreign currency were to fall against the dollar, than the trader would take a loss. Seems simple enough, however traders have option to buy or sell that foreign currency at any time and can go both ways of the currency. So even if the foreign currency were to depreciate against the USD, the trader can still make ...view middle of the document...

The first step is to examine the exchange rate for the currency they want to buy based on the currency they want to sell. Values of the currency will fluctuate over time and the FX trader must pay attention to the fluctuations of the currency pairs to determine the right point of entry. A currency has value, or worth, in relation to other currencies, and those values change constantly.
For example, if demand for a particular currency is high because investors want to invest in that country's stock market or buy exports, the price of its currency will increase. Just the opposite will happen if that country suffers an economic slowdown, or investors lose confidence in its markets.
While some currencies fluctuate freely against each other, such as the Japanese yen and the US dollar, others are pegged, or linked. They may be pegged to the value of another currency, such as the US dollar or the euro, or to a basket, or weighted average, of currencies. *
That movement of capital can also increase currency instability because foreign investors could stop investing at any time and withdraw their money, causing the foreign exchange value to quickly plummet. This has happened in countries like Brazil where foreign investors caused the currency value to increase when they invested in Brazilian companies in the early 2000s. This initially created a positive effect for Brazil, but now that foreign investors are withdrawing their money — causing...

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