Understand forex / currency trade fundamentals…

You should not consider currency trade if you have problems to understand the following fundamental concepts of forex:

• Currency is a medium of exchange, facilitating the transfer of goods and services. It is a form of money, where money is defined as a medium of exchange. There are exchange rates to facilitate currency trade between countries, that is, prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other.
• Fundamentally, the market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply. This does not mean people no longer want money, it just means they prefer holding their wealth in some other forms, possibly other assets or another currency.
• For example, if Richard, an American, wants to buy a property in Canada, what will he do? Jeff sells his on hand USD, buy CAD and remit money to his seller in Canada. In simple terms, there is money outflow from US into Canada. The money then flows from Canadian dollars into property market. The former inflow of money is because of an investment demand for Canadian dollars. If there is no money supply change of both USD and CAD, theoretically Richard moves UP the exchange rate of CAD dollar against USD!
• Of course, one may not notice the change because Richard is not 'rich' enough! Foreign exchange market is huge and is even bigger than the US stock markets in aggregate. This means that no one (individual or corporation) can dominate the market except, to certain extent, central banks! Therefore we understand what central banks are doing before you commit to currency trade even for saving purpose!
• However, people can still move the market up and down because of the incremental concept described in currency trade page.
• What is in it for me? We had two clients migrated to Canada pending for retirement in 1989 and 1998 respectively. One client decides to migrate from Hong Kong to Canada in 1989 when Hong Kong faced the sovereignty issue. The Hong Kong property price was very low whereas Canada property was very high. He realized his Hong Kong property in exchange for Canadian dollars at US$0.84 and bought a property in Canada. It took him 13 years until 2002 to breakeven!
• Another client did the same thing to sell his Hong Kong property in 1996 near the peak and migrate to Canada in 1998 with his HK$5M. Canadian dollar was at US$0.64 during those strong US dollar years. Better still, Canada property price started to rebound. Know what? His net worth grows more than 6 times in 11 years later in 2007. He converted his Hong Kong dollars into C$1.0M as down-payment and invested in purchasing 4 properties worth C$3.5M in 1998. The properties appreciated to C$7.0M in 2007 and Canadian dollars rose to US$0.92 when he sold his properties. After the repayment of C$2.0M mortgage to the bank. His net worth grew to C$5.0M that translated to HK$36M in 2007. Just the appreciation of currency gave him a nice 44% gain in this investment!
• You see the difference! The gain and loss in currency is particularly significant when one takes mortgage in property investment, that is, leveraged or margin investment.

Instead, you can also understand the driving forces for forex rates - keys for currency trade.

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