Trading currency – how the currency value is determined
Have you experienced these questions before from your partner, relatives and friends?
“Which currency will go up?”
“Which currency should I buy now?”
“I currently hold a few Australian dollars. Should I sell it now or hold it?”
This list can all be incomplete but this is a real question that I get from different people in the past.
In this article, I will return to the basics of forex trading and answer the question of how the currency value is determined. If you are new to Forex, hopefully you will find the discussion below useful. If you have become an experienced forex trader, I hope you will still benefit from sharing me.
Currencies are always traded in pairs
Believe it or not, there is no answer to the question “Which currency will go up?” The reason is that the currency is always traded in pairs. I’m sure most of you have gone for holidays abroad before. Remember your last foreign trip. Do you use your home currency to exchange the country currency that you visit based on quotes from your money modifier? You trade forex. In essence, you buy the country currency you visit and sell your home currency.
As you can see, forex quotes always come from two currencies. Let’s use the euro (“EUR”) and the US dollar (“USD”) for example. Suppose EUR / USD is now 1,2500. This means that for every EUR100, we can exchange US $ 125. Instead, for every US $ 100, we can exchange EUR80.
The currency pair is a faction
Currency pairs can also be seen as factions. This means that we can use mathematics to explain the movement of the currency pair. I have found this method very useful every time I need to explain this concept to beginner forex traders.
Suppose C = a / b. The C value will rise if one of the following occurs:
When A rises but B remains constant;
When it remains constant but B goes down; or
When A rises and b goes down at the same time.
Now, if E EUR and B is USD, the value of EUR / USD will rise if one of the following occur:
When the EUR strengthens but the USD remains constant;
When the EUR remains constant but USD weakens; or
When EUR strengthens and USD weakens at the same time.
Now I hope you will know how to ask your next forex question correctly. Instead of asking the question “which currency will go up?”, The right question to ask is “Which currency pair will rise?” At any time, we evaluate the relative strength or weakness of one currency against other currencies.
Use legal requests and offers to explain the relative strength or weakness of one currency against other currencies
Law requests and offers in the economic field are useful for explaining the relative strength or weakness of one currency against other currencies. Let’s consider the following scenario. In both scenarios, we will assume the amount of cash in the state B remains stable.
Country A decided to raise interest rates to control the increase in inflation. In general, when the interest rate increases, there will be an increase in currency demand. In this case, if the currency pair in question is expressed as a / b, we will expect the value of this pair to rise.
Country A decided to increase the amount of money circulating to stimulate the economy and hopefully this will be translated into an increase in business and consumer spending. In this case, if the currency pair in question is declared a / b, we will expect the value of this partner to go down.
Please remember that the discussion above has been simplified especially for the benefit of beginner forex traders. The world operates in a much more complex way which means there are many factors that need to be included in this discussion. It deserves space from other articles in the future.