Page 44 - Ultimate Guide to Currency Trading

world usually do not artificially manipulate the price of their currency in the market, and prices are
allowed to set by the give and take of the market forces.

Are the central bankers of the world your friend or foe?

Even though it is true that the currency market is the largest, most liquid market in the
QUESTION world (and therefore free from participant manipulation), the central bankers of the

world play a huge part in the pricing of a currency. When central bankers give a
speech, just a hint of their intentions can cause a currency to move up or down.

This type of nonintervention is also called a floating rate system. It is the method of nearly all
currencies of the world: in fact, if a currency is not on a floating rate system, then it most likely will not
be a choice of yours (and others) to trade in your FX account, as its movement is linked to another
major currency. This link is called pegging a currency. Developing nations oftentimes peg their
currencies to a more stable currency in an effort to stabilize their home-countries' currencies in
outside investors' eyes. Needless to say, there are quite a few times that this pegging has been tried,
but the pegging of a developing country currency to a developed country currency often leads to
economic problems. When the problems become too great, the developing economy will de-peg and
revalue their home currency in an effort to relieve building pressure on the home economy. The de-
peg often means a devaluing of the home currency. While this can often offer immediate relief to a
developing economy, it can wreak havoc on that country's investors and currency holders.

When a country is on the floating rate system, its price is always changing due to supply and
demand and the market's analysis of the home country's economic condition (growth or recession)
and any future interest rate adjustments that will be set by that country's central bank. Lastly, any
news that would make the market change perceptions about a country's money supply or any chance
that the currency's exchange rate will be adjusted by a central bank or a group of central banks will
also greatly affect the price of a currency in the market.

Overview of Technical and Pair Valuation

Fundamental analysis is often referred to as a security-selection approach, and technical analysis is
often referred to a security-timing approach. While fundamentals can help you determine which FX
pairs to trade and which currency is likely to go up or down against another, technical analysis can
help you determine when is the best time to get into a trade (of those currencies) and when is the
best time to get out of a trade.

Using technical analysis to determine a currency's valuation uses the philosophy opposite of
fundamental analysis and is of different complexity. Technical analysis is the process of consulting