The old saying that says anyone thinking about dealing in commodities ought to lie down until the feeling passes could equally be applied to someone contemplating a spot of foreign exchange trading.
Foreign exchange (Forex) is a market whose riptides can pull a trader under in very short order. Trading currencies is not for the faint-hearted.
Yet it can be an exciting and rewarding activity, for those prepared to do their research and form strong and coherent views with which to inform their Forex trading strategies. (CFDs) offer a cost-effective and straightforward entry into this market, and are especially suited to high-conviction foreign exchange trading.
A zero-sum market
More on that in a moment. First, a look at the Forex market as a whole.
Currencies are an asset class like no other. For a start, they are the means by which all other assets are priced, yet have a price of their own, one that can change second by second.
The only monetary asset against which all currencies can rise of fall at the same time is .
This takes us to a third key feature of the foreign-exchange market, which is that the well-informed trader will need to distinguish between one currency’s strength and another’s weakness. For example, in early 1985 reached an all-time low against the dollar never seen before or since, $1.06 – close to parity.
On the face of it, this was odd, because the British economy was pulling out of the downturn of the early Eighties and Margaret Thatcher’s second administration was well-regarded internationally. A well-briefed trader would have recognised that the story here was one of dollar strength, not sterling weakness.
By contrast, sterling’s strong performance against the dollar in the mid-2000s was very much a vote of confidence in the British economy.
One example from the UK a few years ago illustrates this perfectly. A Treasury official said, off the cuff, that ministers would support the Bank of England in the monetary policy decisions that it took. A statement of the obvious, perhaps, but this was seen as implying the next decision would be unpopular – in other words, a rise in interest rates, and the markets reacted accordingly.
Talk of monetary policy takes us to the key influences on a currency’s exchange rate, of which interest rates are the most important. A rise in rates ought, all things being equal, to make the currency concerned more attractive to traders and investors, because the returns on holding it have risen.