Buy low and sell high or vice versa is what they say, but there isn't a simple step-by-step guide to learn how to do that profitably.
In order to learn the game, let’s start asking the right questions in the right order starting from the bottom.
Currencies are money, right?
It would have been so simple, if the currencies were tomatoes. But unfortunately money are not tomatoes, not a product, neither commodity.
This is what makes them more complex and so unique. We can’t grow our own currency just like we grow tomatoes and we do not have any control over our or any national currency.
It is an exception, if you are the central bank or the head of a central bank.
The currency that we use belong to the national bank that creates them and that is why we must look at it like a service.
Why money is a service?
Central Banks creates money and provide them to people to use it as a service, service that makes exchange of goods and other services easier and faster process.
If money is a service how do I pay for that service?
Money are created thru debt (credit) and the interest rate is what pay for the service.
Central Bank Interest Rates These are the rates at which central banks lend money to commercial banks, the price for the service called money.
How users pay the service?
Everyone pay the price for the service. Thru our government, using our taxes to pay back the credit + interest. Thru the inflation. The money that you own or earn lose value in a certain rate.
Some banks apply negative interest rates policies. Why?
This force commercial banks to offer cheaper (low-interest) loans, mortgages etc.. (debt) and also sets the deposit interest rates to zero.
This policies increase the supply of money and the amount of inflation.
Quantitative easing (QE)
QE is the newest way to manufacture and distribute money to the economy. It was first introduced by the FED on November 25, 2008 as tool to fight the financial crisis. Here is the funny snippet that pops-out of a google search. The last two words are interesting. "Inflation to target"
This points out that central banks have to keep the inflation on a predefined levels
the so called monetary policy goals.
Congratulations, you have obtained better understanding of the great truth of the world economy.
Now, I highly recommend you to reward yourself and your family with this video that tells us how the economic machine works
This is common knowledge, everyone know that supply and demand is what move the prices. The same rule apply to the foreign currency markets.
Who provide the supply?
As we already said, money are created by central banks, so they are the manufacturers of money and the suppliers are all other banks.
What/Who create the demand?
The demand is created by all market participants. Forex market participants are Governments and Central Banks, Commercial and Investment Banks, Forex-Brokers, Investors and Speculators, Businesses, Consumers and Travelers.
What forces currency market participants to exchange currencies?
It's a desire or a need.
- To use a service or own a product that is manufactured and tradable in a foreign currency.
- To make profits thru speculation
- To travel to foreign country
The Currency power, few other perspectives
As been said, currency is a service. Owning or using it isn't free. So, for sovereign country it is a matter of national interest to force national business that operate globally to be paid in national currency.
The U.S. - Saudi Policy, that creates the phenomenon petrodollar is the best example of that.
Forcing the trade of the most needed commodity to be only in US dollars ensure the demand for the US money, it is just a matter of supply to control the price.
“It is far more common for people to allow ego to stand in the way of learning.” -Ray Dalio