First , forex trade signals, like other speculation forms , has one main goal; make some money ! If this is the premise we start out with, that making money is our goal , then how do we do it in this massive global market ?
First you must decide if you are a technical trader, fundamental trader, or a combination of both. In the future we'll have more articles regarding this topic, but now let's just assume you like keeping up with current events and world affairs and are therefore attracted to the fundamental side of the game . You would then need to ask yourself , what are the most important factors fundamentally driving currency movement ?
If the fundamentals is what you're focusing on , forex trading decisions are going to be driven by one thing above all others ; interest rate differentials between countries . What exactly is an interest rate differential ? 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 will be the base rate that determines what you pay on your home mortgage, your credit cards, etc . If you're a creditor you get to use this short term interest rate of 4% as the base rate that decides how much your investments make; such as CDs from your local bank . Now let's suppose the US Dollar has a short term interest rate , which the Federal Reserve sets , at only 1% . How does all I've just said affect the movements of currency?
If the Australian Dollar short term rate is at 4% and 1% is the short term rate of the US Dollar it's all as simple as this : investors want their investments to have a higher yield and since there is more interest in Australia funds are then moved by them to the land "Down Under" . This shift in the investments going to Australia from the US mean that the US Dollar will weaken because supply is larger than demand and the Australian Dollar will strengthen because supply is smaller than demand . Basic economic fundamentals at work here ; value rises when there is higher demand .
Next time you think about your forex trade signals and your next position, you should ask, " what country has the most liklihood of having higher rates moving forward and what country is likely to have lower rates moving forward ?" Purchase currency that is the high interest rate favorite and sell currency favored for interest rates that are weaker and watch your profits grow as investors flows leave the weaker currency and flock toward the stronger one . This is the essence of forex trading.
