At the beginning of their trading career, there are many interested traders who have trouble closing their minds about how forex trading works, or whether forex trading works. These questions point to the heart of the problem – however, they face the wrong attitude.
How Does Forex Work?
Bad intentions, unrealistic goals, greed, inappropriate haste, lack of effort, and inadequate knowledge are the main reasons for many who are trying to start a business career. Before you do anything, sit back and think about how much is behind the forex market and how it works.
Demand and Supply
In economics, supply and demand is a model that describes price creation in a free competitive market. The price of goods is set at a point where the quantity demanded by a consumer is equal to the quantity supplied by a manufacturer.
Let’s say you’re doing grocery shopping one day. You need apples, there is only one vendor that has the right amount of apples. You negotiate, agree on the price, and exchange – a certain amount for a certain amount of apples. You and the seller are both doing business and getting exactly what you want.
The next day, you come out again with the intention of buying the same amount of apples, and now there are only two vendors and both have the size of apples you need. This means there is a greater supply of apples and then there is a need for them. Competition between sellers will reduce the cost of apples because you both feel that you will go for cheaper apples, assuming all other things are equal. A new price will be set, and you will be contracted to match any vendor.
Alternatively, if you came in that day with a friend who was interested in apples, but only had one seller, the apples would be in high demand but the supply would be limited. A seller will recognize this and increase the price of their apples, and you and your friend will surely buy all their apples. It is absolutely essential that you understand the simple logic of this example given as an avid trader, as it is the ABC of the economy and helps you understand how the forex market works.
From here things can start getting more complicated. Applying the Apple Market Condition to the Forex Market: Every time a particular currency is bought, the market generates surplus demand, pushing the price out of balance and pushing it higher. Similarly, each time a particular coin is sold, a surplus supply is generated – again, pushing the price out of balance.
The degree of impact is directly proportional to the size of a contract’s trade. For example, big players like national banks can cause a lot of infections by damaging their home currency supply. Smaller players, like retailers, can only affect the market a little, but they are able to do so through their sheer numbers.