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[abishop]

OK, so this thread is all about foreign exchange. This is one particular area that many stocks and shares traders, commodity, futures, options traders are entering because it is very liquid. In fact, its arguably the most liquid market in the world and its open 24 hours.

To start things off I am going to show you five factors that move the market, so if you are a pure beginner or even advanced these 5 key factors will certainly help you in your trading. These are 5 factors that professional traders look for in their daily work.

To put it very simply they are:-
Interest Rates
Economic Growth
Geo-Politics
Trade and Capital Flows
Merger and Qcquisition Activity

Today we will look at Interest Rates and over the next few weeks I shall detail all 5 factors (simply because there is too much to say in one article and you will not only get bored but perhaps also info overload!)

By being able to predict how each of these factors affect your currency trades you can make the basis for the speculation of some very serious returns...

Lets break them down further.

1 - Interest rates - two different methods to profit from the difference in countries interest rates - interest income and capital appreciation.

Interest Income

Each currency that is in circulation in the world today is always set by the Central Bank of that particular country. Now, to make for interesting reading one should try and finance purchases of currencies whose country has high interest rates from countries with low interest rates. Even more simply put, you get finance from country A whose interest rates are the lowest and you buy country B currency whose interest rates are the highest.

As a pure example: Lets say interest rates in the US are 2.5% while in Japan they are at their all time low of 0.5%. In this pure example (which coincidentally happens all the time) you could have taken out a very low cost loan in Japanese Yen and exchanged it for US dollars and then using those dollars to purchase the highest quality bonds or CD's at the US rate of 2.5%. So basically you would have borrowed at 0.5% and then lent it out at 2% thus making a 2% return from using money that was not your own. This is how you make money from having no money.

Granted 2% is not much, but lets say you took a loan for the equivalent of $250,000 USD that would give you a guaranteed return of at least $5,000. There are sometimes differences of 6 or 7% between countries interest rates! Alternatively you can easily switch the currency signs to read € or £ or whatever, it doesnt matter, the principle here is taking advantage of interest rates and have them fixed. These last 3 paragraphs I have just shown you a bonafid, legal way of making money from nothing and you dont need any license like a bank to do so. Now if that doesnt wake you up I dont know what will. OK so now your thinking...thats great but what about the currency conversion. Well, thats not such a great problem because currencies will always fluctuate upwards and downwards by its very nature over the course of 2,5,10,15,20,30 years etc. Also the interest that you accumulate along the way will increase the balance and thus compound interest. Naturally this is a longer term investment approach.

Generating income from capital appreciation

When a countries interest rate rises the value of the countries currency has a tendancy to also rise, this in itself offers you the opportunity to profit from the increased currency value also known as capital appreciation. For the time being lets stay with the USD and JPY (for beginners thats Japanese Yen). Now lets say that the USD interest rate stayed higher than Japan, the dollar would have continued to increase in value. So, investors who traded YEN for USD gained not only from interest income but from the USD capital appreciation as well.

Next time we shall discuss the second factor - economic growth.

Alan

[abishop]

Factor 2 – Economic Growth

This is the second factor you need to consider when predicting a country's currency movements is its economic growth. The stronger the economy, the greater the possibility that the central bank will raise its interest rates to tame the growth of inflation. And the higher a country's interest rates, the bigger the likelihood that foreign investors will invest in a country's financial markets. More foreign investors mean a greater demand for the country's currency. A greater demand results in an increase in a currency's value. This produces a ripple effect, economic growth inspires higher interest rates, inspires more foreign investment, inspires greater currency demand which inspires an increase in the currency’s value.

As a small example this can be seen when a countries economic data begins to deteriorate. When a country might or is lowering interest rates this can encourage foreign investors to look elsewhere. Meanwhile, another country may already have a weak currency (or perceived weak) and this can lead to exponential sales in exports. Why, because it’s then cheaper to purchase goods from the country with the weak currency. This surge in exports can and does lead to the exporting country to begin to increase its output.

So, by seeking true economic growth data you can sell the stronger currency and buy the weaker currency and pair them off which in reality will not only enhance your profits but you will see larger pip gains.

Next time we will look at the third factor – Geo-Politics

Alan