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It has to be remembered that investment made with inadequate information and underdeveloped planning can prove to be detrimental in the market of foreign exchange trading. It is true that it is one of the best financial markets for investment and trade at this point of time but the market will not be very useful for those who do not have the basic understanding of the ways of this market. That is why, all new traders must be aware of how the market functions so that they can find out the right areas of investment. One of the most important aspects in this regard is the analysis of the market.
The Exchange Rate Determination Theory in Foreign Exchange Trading
The classification of the fundamentals of this theory may divide into four groups. They are the political factors, the financial factors, the economic factors and the crisis. The difference of the economic factors from the others lies in the release certainty. One can know the time and date of the data about the economy in advance.
The Theory of Purchasing Power
This is a theory that says the price of the goods of a particular country has to be same as that with another one which is exchanged at the present rate of exchange. The two versions of this theory are the relative version and the absolute version. As far as the absolute theory is concerned, the rates of exchange will same as the ratio of the general levels of price of the two countries. This version could be applicable if the two countries are consuming or producing an equal amount of goods.
The Relative Version
According to the relative version the rate of exchange from the base period has to be same as the percentage change difference in the levels of domestic price and the change of percentage in the levels of foreign exchange. However, there are problems with this theory as well. It is not easy to make a determination of the base period. These are two of the most important theories in the field of foreign exchange. Another theory that forms an important part of the study of the market is the elasticity theory. According to this theory the rate of exchange is just the foreign exchange price that is responsible for maintaining the payment balance at equilibrium.
The point of the Discussion
Therefore it is evident from the above discussion that foreign exchange trading is not just about investing money and earning out of it. It involves a great deal of study at almost an academic level. That is why, it is always advised that all new traders come prepared before stepping into this market. There is no alternative to knowledge in this market. Experience is also very important but that will come only through practical work. Therefore, it is important that a trader does not get overly confident about his investment skills from the demo trades. However, it is also very important to get into the right frame of mind by trading through the practice accounts before investing in the real market.