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Forex Trade Signals - What Is It?
By John | June 27, 2010
First , forex trade signals, like other speculation forms , has one main goal; bring in money! If this premise is what we start with , that our goal is to make money , how is this achieved in our massive global market?
First you must decide if you are a technical trader, fundamental trader, or a combination of both. Later we’ll have more articles on this topic , but for now let’s assume that you like to follow world affairs and current events and are therefore attracted to the fundamental side of the game . Then you have to ask, what are the most important factors fundamentally driving currency movement ?
If you focus on the fundamentals, there is one thing above all else that will drive your forex trading decisions ; interest rate differentials between countries . What is an interest rate differential ? Great 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 is the very base rate determining what you’re paying on mortgages, credit, and other debt. Also, if you happen to be a creditor you can use as the base rate this 4% short term interest rate that determines the income you get on investments ; which can include certificates of deposites that come from a bank locally. Then imagine that the US Dollar has its short term interest rate , which is set by the Federal Reserve, at 1% . How are currency movements affected by all this ?
If the short term rate of the Australian Dollar is 4% and the short term rate of the US Dollar is 1% it all becomes this simple: a higher yield is sought by investors and since Australia provides more interest funds are then moved by them to the land “Down Under” . The investment shift of capital leaving the United States and moving to Australia weakens the US Dollar because the supply suddenly becomes greater than the demand and the Australian Dollar will strengthen because supply is smaller than demand . Basic economic fundamentals at work here ; where there is more demand for something its value will rise .
When you think about your own forex trade signals and what position to put on next , ask yourself , ” which country will moving forward have higher rates and which country moving forward will probably have lower rates ?” Then buy currency that is the favorite for higher interest rates and currency favored for lower interest rates should be sold and increase profits as investors leave currency that is weaker and go towards the one that is stronger. This is the essence of forex trade signals.
Topics: Investing |
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