Ever been on holiday? Guess what, you’re an FX trader!
For a lot of people it is one of the most important yearly decisions to be made. Where do we go on holiday this year? Once you decide and it’s all booked the next job is to check what currency you will need. Europe is always a popular destination so the currency you will need is the euro.
Have you ever gone from bank to bank or looked at different travel agents to find out the best rate you can get to exchange your hard-earned pounds? Well this actually means you have dabbled in the FX markets.
People often think that trading is complex and for ‘other people in the City’ but it is actually a fairly simple process. You look for where you can get the most value, so will you go to Spain and spend your pounds in euros? Or will you go to America and spend your pounds in dollars? This is not always the key factor in deciding where to go, but getting ‘bang for your buck’ is just that. You use your native strong currency to get things you buy abroad for less.
You also have to put the element of time into this equation. We generally book our holidays well in advance as something to look forward to. So what will the exchange rate be in the future? What will happen in the world to make the pounds you exchange more or less valuable against other currencies? This is where the trading side plays an important role.
We all read in the news when the Swiss lifted their peg against the euro. This meant that technically there would be less overall demand for the euro in the markets so the price quickly fell. The chart below shows the euro trading against the Swiss franc. In the space of 30 minutes the euro dropped nearly 1000 points! That is a significant move. In a matter of minutes the euro became substantially cheaper to buy.
If you had booked to go to Spain then now would be a good time to buy your holiday money.
So what else could happen in the future to affect the euro or the dollar?
1. A Greek default on their debt to the EU
2. A rise in UK interest rates or those in the US
3. Inflation worries and the cost of living increasing
There are many factors that affect the perceived value and therefore demand of currencies. This is what makes the financial markets so interesting to trade. By understanding what can happen in the future you can predict the demand for certain currencies. And if you can predict this demand you know which currencies to buy and when.
Chief Market Strategist
About Steve Ruffley
Steve is an expert trader and educator, and Chief Market Strategist for Intertrader.com. Every month he demonstrates real-life trading techniques in his live webinars, making real trades with real money in real time.
Steve’s unique webinars explain all the things you need to know about how to trade the markets and how to understand economic data. If you want to gain an understanding of the factors that move global FX markets then join Steve on his next webinar to find out more.