The Foreign Exchange Market (Forex) is the most extensive stock exchange market in the world, seeing billions in currency exchanges daily. But like anything in life, Forex is driven by supply and demand. In order to be successful in the Foreign Exchange Market, you must first understand the basic principles that drive the market.
Supply and demand means exactly what it sounds. It refers to the amount of product available versus the demand for that product. If the demand exceeds supply, the value will inevitably increased, whereas it will decrease when the supply exceeds demand.
Supply and demand are crucial in Forex trading. They are actually the crux of any market's success or failure. In the case of foreign markets, imports and exports often provide a strong base to an economy. Investors generally closely watch the imports and exports of specific countries, with changes closely monitored for impact on the overall economy of a country.
Imports and exports aren't the only determinant of a country's success in the foreign exchange market. In fact, cash flow is the primary determinant. A country could be creating product and successfully exporting it, but if expenditures outrank income, a country will experience the same economic troubles as a business.
In that sense, those interested in the Forex market should watch supply and demand carefully to determine the success of a nation's economy. As demand increases, the exchange rate rises as well, with the market continuing to adjust to accommodate the changes in exchange rates.
The Forex market is complex, comprising large corporations, financial institutions, money brokers, and others. All of these factors can influence supply and demand, but in recent years, speculators have become a much larger part of those involved in Forex trading.
Speculators make an investment with a future price change in mind. They "speculate" on a change in value in a foreign market's economy. Because speculators can often act as a group, based on ideas they share, their predictions can actually help drive the market. The problem is, these predictions are usually based on actual events--interest rates rising, a rise in the unemployment rate, natural disaster--so large groups of speculators will often act at once, further ensuring the economic prediction will come true.
For instance, if large numbers of investors sell based on predictions that a certain country's value is about to change, that country's currency will depreciate. As the price goes down, others will sell as well, causing it to further depreciate. It's a vicious cycle that can have serious adverse effects on a country's economy.
In order to increase a country's economy, it's important to get that country's product into other countries, where it will then catch on and demand will increase. But it is equally important for businesses to have the resources to meet demand. Too much product shortage can weaken a product, causing the public to move on to something more readily available.
Supply and demand drive the Forex market just as they drive the business world. Increased demand raises prices, strengthening economy. With an increase in the number of Forex speculators, the world exchange is more driven by the individual investor than ever, making each individual play an important role in the process.