Archive: October 26, 2020

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How To Determine The Exchange Rates and The Factors That Affects It

The Forex Trading market is much more complicated compared to the bond or stock market. As for predicting the rate of foreign exchange, you will have to predict the performance of the whole economy. There are also multiple factors that need proper consideration when determining the exchange rate. Below are some of the considerations that you need to keep in mind when joining the FX market.

Expectations in the Future Pricing

The Forex market is also a financial market. The price seen in the financial market does not mirror the price available today. Instead, it reflects the future expectations with bases coming from the information which is already available today. That being said, the most important way to determine the rates of a currency pair is through expectations about the future.

The Monetary Policy Comparison

The exchange rate is something like a comparison of the policies of two different countries. It is important to understand that these exchange rates are more like absolute instead of relative. Here are the factors that affect exchange rates.

Inflation – Exchange rates are the ratio of the expected unit counts and the expected unit counts of another country. But inflation causes an increase in the number of currency units. For instance, if your particular currency is facing an inflation rate of 6% while the other is at 2%, then there’s a huge possibility that the ratio between the currencies will change. But inflation rates play a vital part in determining the exchange rate.

Interest Rates – By the time an investor gets a hold of a currency, they often get yielded when it comes to the terms applied on the interest rate of that particular currency. Currency valuation also gets subjected to changes in the interest rates.

Fiscal Policy Comparison

The Central Bank of your country controls the monetary policy. Meanwhile, the fiscal policy is mandated by the government. The Fiscal policy also plays an important role since the monetary policy is subjected to changes at any time.

Public Debt – A country facing a large amount of public debt signifies that the government will be making large interest payments as well. Investors will then see if this amount can be collected through tax. If this isn’t possible, then it means that the country will be monetizing their debts.

Budget Deficit – Aside from public debts, another factor that can influence changes in the FX rates is the budget deficit. A budget deficit is known to be the forerunner of the public debt. When a government has more money than they currently have, this will result in a budget deficit. If this deficit happens, it will be financed through debt.

Political Stability

Another factor that holds prime importance when it comes to the FX rates is political stability. This modern monetary system that we have nowadays is Fiat money. In this case, the money is considered nothing but a promise held by the government. If dangerous situations happen, the promise will become worthless after a new government takes place.

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Why Trading Consistently is Very Important in Avoiding Huge Losses

Some traders end up positively while others are not lucky enough to experience continuous success in Forex Trading. Even the most successful Forex traders do not have the perfect track record with consistent wins. Moreover, it is not the small, routine losses that can hurt their trading but the big ones. One thing about these big losses is that they are unexpected and most of the time counter the strategies of the traders or their trading plans. These big losses are also known as big anomalies and therefore, they are totally dangerous.

How To Keep Things Steady Amidst These Big Losses

Most traders tend to protect their trades by using several stop losses. They are doing this to keep their accounts from getting impacted when a sudden movement of the market comes along. But, unfortunately, big losses aren’t expected. It is a sudden, unexpected move and you might not be prepared for it. Traders make mistakes, even those who have long experiences in the Forex market but not everyone is capable of admitting their mistakes.

Where do these big losses start?

Basically, the root of the problem is very basic – traders tend to take on too much risk. If you really want to attain success in trading, you need to understand it more so you won’t find yourself in that situation.

Getting Too Greedy

Getting too confident with your trades can sometimes be harmful. Once you become too confident, you will dare to enter a trade that has a bigger risk placed on your profile. They simply think that they know the market all too well. Then, they buy even more than what they should. Though this is considered a mistake of newbies, even professional traders tend to commit this as well.

Not Able to Get Out in Time

One of the biggest mistakes a trader can make is moving their stop loss and not being able to get out in time before the big loss happens. Most of the time, these decisions are made out of emotions. The trader thinks that the market will recover soon but eventually, it didn’t and it got even worse. Since the trader has so much to lose on the trade, eventually, he can’t easily close it out. Instead of becoming profitable, the trade eventually turned out to be a huge loss.

The reason why you utilize stop loss is to avoid incurring big losses. But because you kept on moving your stop-loss order, it impacted negatively on your trades. If you keep on moving your stop loss, you will become prey to the temptation to avoid a loss. But, what you are doing is risking your positions being stuck in a much bigger losing trade. Unless you are ready to take a seriously big loss, it is much better to avoid moving your stop-loss order.

The biggest rule in FX trading is keeping consistency. Long, consistent profits can only be achieved with consistent trading and not simply killing one trade or hoping that the market will turn towards your original plan.