How is the exchange rate formed, and on what factors does it depend? Perhaps, this question is of most interest to novice traders who have decided to try their hand at Forex. I have heard indignation more than once that the schedule "again rushed somewhere in the wrong direction, and indeed, why this happened, I analyzed everything." However, in fact, there is no negative moment here, you just need to be able to correctly use exchange rate fluctuations. In addition, a trader without significant experience does not always take into account all the factors that have a direct impact on the formation of the exchange rate of a particular currency. Therefore, today's article will be devoted specifically to the answer to this question.
How is the exchange rate formed in simple words
So where do exchange rates come from? Specifically for the country, they are formed as a result of trading on the currency and stock exchange. In the national market, too, everything is interconnected. If foreign currency is mainly sold, then the rate of national money is quite logically strengthened in relation to it. But if the currency of another country begins to be in high demand among investors, then the opposite situation occurs. When rates change dramatically over a short period of time, this phenomenon is called devaluation.
According to the results of trading that took place on the stock exchange throughout the day, a weighted average result is formed for all foreign exchange assets. It will become the official rate the next day. This serves as the basis for recalculating the balance sheets of companies and all official settlements between counterparties. Exchange rates also serve as the basis for setting buying and selling rates offered by commercial banks to their customers.
But why do currency fluctuations occur continuously? Demand and supply for a particular currency are constantly changing their values, which has a direct impact on the national money of each country. And within a single day, rates can change drastically countless times. They either weaken or strengthen. And it all happens at the same time and in different directions. Changes in exchange rates are called volatility. And most experienced traders are well aware that you can only make money in an active market. After all, their income consists just in the game on the difference in exchange rates. Lateral trends will not bring profit to anyone.
If you are also planning to participate in Forex currency trading, be sure to study broker rating. To date, these companies have formed a lot. And in some cases, scammers are hiding under the tempting offer of a reduced commission for transactions and other "goodies". In order not to lose your savings, carefully study the reputation of the broker and its position in the official rating.
Another tip is to choose an effective trading assistant for yourself. And this is true for both beginners and experienced traders. After all best robots capable of delivering truly unique results. They definitely react faster to exchange rate fluctuations and the formation of new trends. Such programs quickly analyze the market and in their work are guided exclusively by a given algorithm, while a living person is always subject to excitement and the risk of excitement. Robots allow you to trade currencies automatically, relieve stress and the need to constantly monitor rates. They also have many other advantages:
- more accurate entry into the transaction;
- the ability to work around the clock;
- parallel tracking of rates of several currency pairs at once;
- simple use;
- availability of convenient mobile applications (in most cases);
- the ability to trade independently, but according to their ready-made signals;
- they are simply created for successful scalping.
Many assistants are offered for free, which saves you a lot of money.
How exchange rates get to commercial banks
These organizations closely monitor all changes and global market trends. As a result, exchange rates for retail clients are also formed under the influence of global processes in the world economy. It's not the bank owners who set the numbers they want. Yes, the buying and selling rate differs from the data published by the Central Bank. This is the bank's profit from trading operations involving the currency. However, all this directly depends on the official weighted average rate set by the Central Bank. The offers of banks will not differ too much from it, both for individuals and for legal entities.
And here's how it all works. When a bank actively sells currency during the day and its volume turned out to be more than what it purchased through exchange offices from customers, it needs this money. Consequently, the organization sets a slightly more favorable rate in order to attract those people who want to sell this currency to him. And vice versa. So with the help of price, the structure of supply and demand is regulated. This method is relevant for absolutely all goods in trade.
Banks have the ability to take on some risks. For example, to acquire currency in the hope that devaluation will happen. However, they cannot do this in any quantities, as they are severely limited by existing legal regulations. The volume of buying and selling foreign currency for credit institutions should not go beyond the established currency band. This significantly reduces the potential risks for these organizations (and even there the possibilities are such that, without control, the bank can simply go bankrupt at the moment if it does not guess the direction of the currency trend, which is clearly not included in the plans of the state), and also prevents speculation on a huge scale.
Where does the difference between the selling and buying rates of currencies come from?
This is necessary, first of all, to cover the costs arising from foreign exchange operations. This difference is called the spread. It helps to regulate the profitability and turnover of the exchanger. If he decides to deviate strongly from the Central Bank rate, then he will have fewer clients, since the conditions for clients will not be particularly favorable. But each operation will have high efficiency.
The formation of rates in exchange offices is greatly influenced by the cost of foreign currency cash. And it includes not only the price of the banknotes themselves, but also:
- payment for utility services of the premises;
- operator and security guard salary;
- item maintenance.
By purchasing or selling currency in such organizations, you always compensate for their costs and still allow you to earn on the exchange operation.
However, this does not mean that exchangers are trying in every possible way to cash in on the population. If they buy currency above the rate set by the Central Bank, then this is necessary to meet the increased demand of customers and to prevent the downtime of the business itself.
How to respond to currency fluctuations
Price fluctuations happen all the time, you can see it on live chart. Is it worth frantically buying or selling currency at the slightest movement of the market? Definitely not. Such actions must be fully conscious and analyzed. Currency transactions are most often short-term in nature, since the volatility of this asset is much higher compared to commodities, raw materials and precious metals. Of course, you need to follow the courses. But do not forget about strategy and composure.
If you are simply prone to panic and are ready to run to buy foreign currency simply because of the fear that something global will happen in the economy, this is not recommended. Otherwise, you will incur considerable losses. Remember that the regulator always has a huge gold and foreign exchange reserve, which provides serious support for the national currency.