Forex Volatility & Market Expectation
Volatility, or the tendency for fluctuation that can affect your earnings within the stock market, is typical within a domestic market but even more evident and much stronger on the Foreign Exchange Market. What factors affect the value of currency on Forex, and is there any way to control this?
Devaluation & Revaluation
Devaluation refers to the purposeful decline in value of a currency in relation to other currencies as charged by a government entity.
For example, if the U.S. dollar is worth ten units of a foreign currency that is then devalued by 10%, the U.S. dollar is now equivalent to only nine units of the foreign currency. This makes any items purchased in the foreign currency more expensive for those trading in U.S. dollars, as the exchange rate is lowered. It also makes items in the foreign country less expensive to trade in U.S. dollars.
An opposite change in value can also occur, raising the value of the foreign currency. This is referred to as revaluation. While it may seem that purposely adjusting the value of a nation’s currency is like cheating or taking an unfair advantage by making foreign products cheaper to purchase and increasing the value of exports, there are regulations in place to prevent the manipulation of exchange rates for such purposes. The International Monetary Fund assists in prohibiting such occurrences and enforcing the policy.
There are ways in which you can take advantage of devaluation and revaluation, which will be discussed later on. However, what happens when the value of a foreign currency changes due to market fluctuation rather than purposeful reductions or increases by a federal government or federal bank? What effect do appreciation and depreciation have on the stock market?
Appreciation & Depreciation
Depreciation can be easily related to the life of a car. As soon as you drive a new car off the lot, the value is almost cut in half. This is extreme depreciation. However, over the next few years, the car continues to lose value at a more gradual pace. This is considered to be depreciation as well.
Currency appreciation and depreciation are changes in the value of the currency that are driven by market forces rather than by government mandate.
For example, in an attempt to repay certain loans, in 1998 the Central Bank of Russia announced the coming devaluation of the ruble. The exchange rate, which was currently 6 rubles per U.S. dollar, would over a period of time change to 9.5 rubles per dollar, effectively a depreciation of 34%.
However, prior to the change, there was a widespread panic within the former Communist nation, and the value of the ruble dropped due to many people in Russia opting to trade in their securities prior to maturity. In a single day, following the announcement, the Russian ruble was depreciated by an amazing 25%.
The same sort of crisis occurred in the 1920’s with the crash of the U.S. stock market. In that time, a nationwide panic set in, and people rushed to the banks to withdraw cash that was not available or to trade in securities and stock options that were not matured. In running to the bank, people actually caused the crash rather than escaped it.
On the flip side of the coin, too fast of an appreciation sets up a country for inflation, or an increase in the retail value of products sold to the public based on currency valuation. While inflation is bound to occur, it can be minimally tempered through the use of the currency valuation.
Appreciation can be related to a vehicle as well. Often, men enjoy taking old cars and restoring them to their original beauty. In doing so; they drastically increase the value of the vehicle or appreciate it.
The ever-changing rates of currency conversion and volatility of the market create an inherent market risk, or a day to day potential to experience loss due to fluctuation in securities prices. There is no way to diversify this type of risk, as it is always going to affect investment to a certain degree.
However, some risk can be offset by particular types of investments or ways of investing that are more secure or protected. These options include the ability to preset your purchase or sell price for a specific commodity, as well as using various predetermine order levels to place orders and complete transactions.
Of course, do not delude yourself into thinking that you can rid yourself of all possible risk factors on the market. There is always a cloud hanging over your head waiting to burst, and all it takes is one little pinprick. You must always exercise caution, though the idea of playing the stock market entails danger and excitement inherently.
Aspects Of Trading
You are now versed in the functionality of the stock market and have decided that you are willing to accept the risk factors involved. That said, you want to know everything you can about balancing the risk with intelligent investment options. How can you be sure that the risks you take are more likely to be rewarding in the long run than destructive?
Long & Short
One of the most important parts of making money on the stock market is to determine your position. The long position is basically the purchasing position that you are about to take on a long-term commitment for ownership of some stock, security, or other traded commodity. The short position, by contrast, is the selling position you are shortly going to dispose of the same sort of ownership and any responsibility toward it.
The best time to take up the long position is when stock prices are low. This will get you into the market at a reasonable price and increase your chances for profitability as new offerings go up in price and older investment options recover or rebound.
In fact, as others take the long position and purchase at the same time you do, this will actually drive the value of securities up through the standard rule of supply and demand, causing the beginning of what could be a bull market.
You may equate this with the end of the month at a car dealership. The prices tend to drop on the cars left on the lot for sale, and the dealer is more often willing to bargain because he or she wants less inventory on the lot.
Likewise, when stock prices are low, some will panic and dump all of their holdings at these low prices, thinking that their shares will never recover the value.
When prices are high, it is likely time to turn around and sell your shares to bring in a profit, not losing anything on unrealized gain.
You should never sell for a price that is below your cost, as this brings negative equity and loss of funds. You should always sell for the greatest amount of profit that you feel is safe.
In other words, if you buy a security at $15 dollars per share, and it quickly rises to $25 dollars per share, you may very well feel that it could hit $30 dollars per share within a week.
However, you must determine if you are willing to risk losing your already secured earnings of $10 dollars per share to wait that long, should the price actually fall, so you may decide to sell at the current high price.
The Complete Guide To Forex (4 of 10) – https://www.mastersofmoney.com/thecompleteguidetoforex4of10/
Risk disclosure: *All investments involve risk. Before making any financial or investment decisions, we highly advise that you seek the advice of a properly licensed and trained investment professional.