Foreign exchange rates reflect the ebb and flow of international trade and investment. Sometimes, things are relatively calm. Other times, huge flows can be seen passing through one or more regional forex markets, roiling prices to a fare–thee–well. Since you can only make a profit if currency pricing is volatile, this kind of up-down situation should be welcomed. However, beginners may want to concentrate their trading attention on the European “majors” (i. e., EUR/USD, GBP/USD and USD/CHF) as these pairs, historically speaking, are not as volatile as some others. In addition, liquidity is usually ample during European and North American trading hours, so bid/ask spreads are tight.
One reason why things can get exciting is the sheer variety of who can be in the market place. On any given day, the “Giant Panda” or “Buba” or the “Old Lady” could be out and about, buying or selling “yards” (billions). This may attract the attention of everyone from “Mrs. Watanabe” in Japan to “Kiwis” living in New Zealand.
Why Foreign Exchange Rates Alter
In terms of daily turnover, forex is the largest capital market in the world. Every day, more than $4 trillion of currencies change hands. The variety of the participants is staggering – involving everyone from the “Giant Panda” (the nickname of the People’s Republic of China’s central bank) to “Mrs. Watanabe” (the moniker of a horde of Japanese housewives who discovered forex trading about 10 years ago and have become a significant force in JPY-related trading). As a result, the prices of most currency pairs rarely stand still. Regional markets provide certain variations. For instance, euro-related pairs are far more active when Europe is open for business than in Asia. Similarly, the Australian dollar leaps into being when Sydney is open.
What Do Changing Foreign Exchange Rates Mean For Traders?
In forex, volatility breeds opportunity. For instance, on the whole, American banks need more US dollars than other currencies. Thus, during the North American trading session, it’s common to see the prices of the EUR/USD and AUD/USD go down, while the prices of the USD/JPY and USD/CHF float upwards. In Asia, where there are a lot of exporters with “too many dollars (or euros)”, the opposite usually occurs. Normally, there’s selling pressure placed on the USD/JPY as well as EUR/JPY. As a result, it’s not surprising that many a Swiss banker has been known to get up very early and scoop up “cheap euros”. This is also one reason why American banks have such large branches in London or Geneva.
How To Make The Best Of Changing Foreign Exchange Rates As A Trader
You, too, can avail yourself of these regional differences. A fun trade is buying the AUD/USD at its lowest ebb during the North American trading session (only on Monday, Tuesday, Wednesday or Thursday) and then selling the pair within the first hour that Sydney opens up. This “time zone trade” takes into account the natural need that all Australian banks have for more Australian dollars. Another “oldie but goodie” is buying the GBP/EUR near the end of any month and selling soon thereafter. This is because the European Union needs to pay a rebate to the UK Government before the end of each month. Since this requires changing euros into pounds, momentary upward pressure on the GBP can be considerable.
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