Driving forces in the foreign exchange market from the view of Siby varghese
“Forex market” is one of the terms that we often come across in our daily life. Upon listening the term you may have asked yourself what could be forex market. Forex market is a market where trading of currency takes place. It is different from the stock and commodities market. Forex market is a decentralized market having network across the world. The investor trades in currencies in a pair of two. You can either buy or sell a currency. If your analysis indicates that the value of the currency is going to rise you should buy it and if it shows downfall you should sell it. A forex market is highly volatile thus increasing the chances of higher profits. Different countries come together to make trades like Forex trading India with US currency.
Factors that move the forex market
- Central banks: The supply of currency in a country is controlled by the central banks. Central banks have the authority to announce measures that can affect the value of the currency.
- News: Generally the commercial banks look forward to investing their capitals into economies that have a positive and strong outlook. If the news of certain regions is positive it increases the investment in that region. Thus, leading to increased demand in the currency of that region.
- Market sentiment: Market sentiment work parallel to news reports. If the news of currency of a particular region heading in a certain direction is released, it becomes one of the major factors in driving the forex market.
- Credit ratings: The aim of the investors is to maximize profit by minimizing risk. Credit ratings of currencies are one of the forces that can attract or repel investors. A credit rating is an assessment of the country’s ability to repay debt. The country which has high credit rating is considered as the safest option for investment.
Terms used in the forex market
- Base currency: the Base currency is the first currency in the pair of currencies in which the investor is planning to trade.
- Quote currency: Quote currency is the second currency among the pair of currencies.
- Spread: The term spread denotes the difference between the buy and sells the price of the currency.
- Lot: Generally the currencies are traded in batches or lots. These batches are used to standardise foreign exchange trades.
- Leverage: Leverage is the term used when the investor gains exposure to a large number of currencies without paying full value of the trade.