Buy low then sell high or vice versa.
A "short" position is generally the sale of a asset you do not own.
Investors who sell short believe the price of the asset will decrease in value.
Derivative financial instruments introduced the opportunity to make profits even if the value of a asset is falling.
Yet short selling comes with unlimited downside risk but limited profit potential.
Until April 20, 2020,
When the rule was broken by a derivative financial instrument.
The futures market price of "West Texas Intermediate crude" the U.S. benchmark, dropped to minus $40 a barrel.
“Unprecedented” event a Black Swan that liquidated many margin accounts without even issuing a margin call. Retail traders paid billions to...? The ones that made the profits
This may sounds confusing, but it is just one of many more ridiculousness created by abstract tools and imaginary techniques, available in the world of financial speculation.
Trading currencies online "forex-trading"
The shortcut to $6.6 trillion market mostly driven by speculative deals. A speculative trade is any deal motivated only by the expectancy of favorable price move that eventually will transform to profit after "settlement".
What is a currency
How it's made?
It would have been simpler, if the currencies were like tomatoes.
But unfortunately the properties of modern money the "fiat currencies" almost have no analog.
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.
Currencies that we use every day, actually belong to the national bank that created them.
Even those in your wallet and bank account are fully managed by te issuer, their value could depresiate slowly for everyone or vanish in a snap just for you, simply by blocking your bank account.
We have no controll over fiat currencies even our own money does not belong to us.
Money are just a service, service used and loved by many but offered and controlled by central banks.
Central Banks creates money, distribute them to the economy then people start to use the money just like a service, service that makes
exchange of goods and other services easier and faster process.
Money are created thru debt (credit) it's interest rate create Inflation cycles and super cycles
How users pay the price
Central Bank Interest Rates These are the rates at which
central banks lend money to commercial banks, the price for the
service called money. Everyone pay the price for the service
called money. The government is
using collected taxes to pay back the credit + interest.
When the factories (CB) produce currencies they create
inflation wich is then amplified by the mechanism called
"Reserved Banking". So the money that we own lose value in a rate
equal to the inflation level.
Holding cash is expensive
Some banks apply negative interest rates policies. Why?
Appying fee to cash deposits for Banks and financial institutions
is a motive to move the cash out. Banks then are offering them as
low-interest loans, mortgages etc...
increasing people spending and boosting the economy. 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.
Learn much more about money and bank policies watch an educational video on 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?
Central Banks issues currency so they are the manufacturers of
money. Commercial Banks can increase the money supply thru
"fractional-reserve banking" mechanism allowing fresh money
creation in the form of credit.
What 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
How Central Banks Control the Production and Supply of Money
Source: TheBalance
Because money are produced thru credit, the interest rate is their measure of price.
As we all know price can control the demand.
Economists use the term "Elasticity Coefficient".
So interest rates that determines currency value.
The discount rate and the Federal Founds Rate .
This terminology is specifically used by the FED in USA, but most of the CBs around the world implement the same techniques. Second most used cash flow controller are the direct market operations. With other words, buying government bonds, equities and whatever needed to increase the liquidity and economic activity.
More than 90 % of currency deals are speculative trades
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.
“Getting rid of a delusion makes us wiser than getting hold of a truth.“ -- Ludwig Borne
Past performance is not indicative of future results