Currency trading, also known as Forex, is performed to make profits out of trading different currencies of different countries. Due to the varying exchange rates, the profits made through Forex trading varies. As a currency trader, you have to check when the exchange rates vary in your favour so that you can get the highest amount by trading the currency you have. There is no physical transaction included in this business. As the Forex trading market is highly volatile, you need to take into consideration, the various factors affecting the business. Better planning with sound knowledge about the market can help you make better profits from Forex trading. Here we discuss some of the factors that can influence the trading of currency.
Exchange Rates
One of the most important factors in Forex trading is exchange rates, on which the profit is majorly dependent. These are rates at which a currency is bought, sold or converted to another currency. The system of fixed exchange rate allows you to trade your currency for another one for a fixed rate. This is unaffected by the market change or any other factors. Fixed exchange rate usually is done for major currencies such as USD or Euro.
When buying or selling a currency, traders look for the benefits. Even if the economic conditions of the country are good, traders might feel that the exchange rates of the currency may bring losses to them. Good traders invest on a currency only after taking into account the potential fluctuation and not just the current rate of exchange.
Inflation
Inflation affects the market of currency trading in a big way. Inflation indicates that the value of a currency has reduced so that the number of things purchasable with the currency becomes less. If inflation is on the rise, the value of the currency gets lesser. If a currency trader understands that the currency will be doing better in the near future, even though the present situation is unfavourable, he will buy those currencies. If his prediction is true, he will have the currency that can get him huge profits later.
Speculation
Speculating that a currency will do in the near future is a factor affecting the trading of currencies. If you are an experienced currency trader, you might know the safe currencies on which you can invest that are unaffected by global economic changes. It can also happen that when a currency trader is doubtful on which currency to invest, he invests on the currency considered to be safe.
Changes in the Political Arena
Major changes in the political scenario can influence Forex trading. Events such as civil wars can affect the economic situation of a country negatively. In such situations, currency traders look to invest on safe currencies so that they are not in loss.
