Forex Appreciation & Depreciation

As currencies from different countries interact in the Forex market they will face periods of appreciation or depreciation in their value respect to other currencies being traded in the global currency markets.

In other words, this means that the appreciation or depreciation of a currency is a direct consequence of the market forces and not of some kind of government mandate. For example, a great depreciation can happen when driven by the panic of bad economic news in a country, most holders of the currency start trading it for more secure assets causing the currency of that country to depreciate; as for the ruble against the U.S dollar in the 1998 crisis in Russia.

Also, it can happen that suddenly everyone wants to buy a particular currency so this will cause its value to increase or appreciate, given that country’s currency more buying power but maybe starting an inflationary process at the same time and making the exports of this given country more expensive in the international market.

As you can see from what we have discussed in the paragraphs above. Appreciation and depreciation of a given currency have their good and bad consequences for the countries holding them. In the same manner, this two poles of the market value of the currencies must be treated with different approaches by the forex trader.

This takes us directly to the concepts of having a long and short position in our forex trades. In short when you have concluded or have signaled that the currency you are selling will appreciate you go “long”, this is you want to have the currency as long as necessary for it to increase its value so you can make a profit. On the contrary, if you think that particular currency will depreciate you then go “short”, you want to get rid of it fast, at the price you bought it before it loses more value.

Source by Adrian Pablo