The global economy is currently going through one of its most challenging periods in recent history. Hundreds of media stories every day report on the possible causes and remedies, but the fact remains that forex traders can benefit from some of the turmoil. The first step for taking advantage of unusual or adverse circumstances is to develop a strategy. After that, review all the things that are known to directly affect the prices of heavily traded currencies. Don't overlook the unique historical power of the COVID pandemic when analyzing the marketplace, whether you trade just a few currencies or dozens.

Finding a Strategy That Works

What's the best strategy for trading foreign currency pairs in order to reap financial rewards while the world economic situation worsens? And, what is forex trading to you? First, forex trading enthusiasts need to understand the basics of how the forex markets operate. That means reviewing key definitions, currency quotation methods, the three major markets, and the inherent risks involved.

Additionally, every effective strategy calls for research. That means spending time reviewing all the significant factors that affect currency prices worldwide. For example, interest rates, inflation, and political climates are often cited as the three prime movers of international foreign-exchange rates. Each one is discussed in greater detail below.

Understand the Key Factors That Affect Global Markets

When you trade currency pairs, it's vital to know the relative strength of one compared to the other. For example, if you usually buy and sell JPY/GBP, or the Japanese yen against the British pound, take the time to compare the key factors for each currency's issuing nation. What are those factors? There are dozens, but most FX enthusiasts focus on five, namely local interest rates, inflation, overall economic health, political stability, and public debt. Here's how each one affects the local currency. Keep in mind that when you buy a currency pair, you're essentially betting on which of the two is stronger.

In general, inflation, public debt, and political instability work against a currency. Likewise, interest rates and the local economy's health tend to support the strength of a monetary unit. Taking a hypothetical example of a fictitious pair, AAA/BBB, if the nation issuing AAA is suffering high inflation compared to nation BBB, then BBB would typically be the more robust monetary unit if every other factor were precisely equal between the two.

The Impact of COVID

Some nations are having a harder time navigating the economic hardships imposed by the seemingly never-ending COVID pandemic. When you trade an FX pair, always research the respective nations' reaction to the crisis. Many regions have suffered extensive business closures and long-term damage to their local financial institutions. In some of the world's healthier, largest economies, those effects were not as widespread or deep.

What's the opportunity for traders in this respect? In essence, there's now a new parameter by which to measure the stability of any nation's monetary unit; namely its reaction to the COVID pandemic. Along with looking at inflation, interest rates, and other traditional measures, the local area's reaction to the pandemic is a consideration.

The Three FX Marketplaces

If you're aiming to get involved in foreign currency trading for the first time, it's essential to know that there are three main marketplaces. First and most popular is the spot market. This is the 24-hour, 5-days-per-week location where the vast majority of money changes hands between individual trading practitioners. Action is focused on supply and demand, and all the buying and selling is one in real-time.

Second, the forward market is the place where individuals and some institutions make private deals, via binding contracts, for future exchanges of currencies. Every contract lists a specific amount of currency, a precise rate, and the time of the execution. Finally, there's the futures market. It's much like the forward version, except that there are no private deals. All business is conducted on a massive exchange, like the stock market, and all the contracts are standardized.

Risks and Opportunities

The biggest opportunity for new and established FX practitioners is the chance to accumulate small amounts of profit over a long period of time. By avoiding the use of margin and high degrees of leverage, it's possible to make reasonably accurate predictions about which currencies will do better than others. As with every kind of trading, forex has its downsides. The main one is that most participants use leverage, which exposes them to higher-than-normal levels of risk. Always be aware of how much money you are at risk of losing on a particular transaction.