subject: EXCHANGE RATES, COMPLEXITY AND FOREIGN EXCHANGE TRADING [print this page] The Forex market is the fastest growing market in the world with regards to new traders. It already is the biggest in terms of volume but its complexity is always completely underestimated by new traders. Rather than just throwing money at a particular currency, you need to analyze a huge number of variables which is best left to a professional.
The lack of knowledge of the majority of new traders is startling yet it shouldn't be. All sorts of products hype up the market as some sort of magical guaranteed profit venture. Their worst crime is to understate the complexity of the market. To say that foreign exchange rates and what affects them is complicated is a wild understatement. The first clue to the difficulties that lie on the Forex market should be the high percentage of losing trades suffered by investors. The next hint should be the fact that sometimes trillions of dollars pass through in a day and the final one should be the knowledge that some thirty currencies are traded against one another.
The simplified version of the market suggests that all a new trader needs to do is buy dollars and hope that it goes up against the euro. The fact that the main principle of the market is to simply put one currency against another is part of the reason for the huge interest from people who have no business risking their money in something they know nothing about. The insane amount of coverage it gets coupled with false information about how easy it is presents another problem. Finally, the fact that it is open 24 hours a day means that anyone with ready cash and an internet connection can join.
Yet new traders don't know the first thing about why currencies goes up or down in relation to one another. There are a mind blowing number of computations, calculations and considerations to ponder. Forex trading is divided into the derivative market which includes aspects like futures not to mention the real estate and commodities markets. If this isn't confusing enough, you also have to take into account the actions of the stock market and bond market. These markets are divided up into little sub-markets which contain trades in a variety of different exchange rates. Confused yet?
The final nail in the myth of simplicity is the fact that you also have to consider the economic status of the countries involved in the market. If they have trade deficits, inflation, surpluses, domestic bliss or instability and international strength or weakness then this will naturally affect their currency's strength. Comprehending all of this information takes years which is why experienced traders will always come out on top when compared to hot-shots who think they know it all. Without a well-thought out complex technical analysis and trading strategy you cannot hope to succeed on the Forex market.
Hopefully, this information will help dissuade new traders from plunging headlong into the Forex market. It is necessary to be circumspect when it comes to trading with foreign currency. If you are planning to invest in the market, only do so with the aid of a registered professional broker who has knowledge of all the aforementioned variables.
EXCHANGE RATES, COMPLEXITY AND FOREIGN EXCHANGE TRADING
By: Maureen Holland
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