Chapter 1 lesson 1 - Intro to price algorithm and it's functions Flashcards
Intro to price algorithm and it's functions
What is the market?
The Forex market is a global market place for exchanging national currencies.
Who owns currencies?
Central banks
What is the role of central banks?
To control their countries currency by achieving and maintaining price stability in the interest of balanced and sustainable economic growth.
How is price delivered?
Price is delivered by an algorithm, Interbank Price Delivery Algorithm, that operates 24 hours, 5 days a week. It seeks to deliver buyside and sellside liquidity in the market, and also rebalances price to fill inefficiencies in the market.
What is Interest Rate Differentials?
An interest rate differential is the difference between interest rates in two different countries or currencies.
It is calculated by subtracting the interest rate in one country or currency from the interest rate in another country or currency.
Are candlesticks important?
Candlesticks only show a movement in time. Order flow is more significant
What does the chart represent?
The chart is essentially a plane which shows the the relationship between time(x-axis) and price(y-axis).
How does Interest Rate Differentials affect the forex market?
Interest rate differentials can be used to compare the relative attractiveness of investments in different countries or currencies.
For example, if the interest rate in the United States is 4% and the interest rate in Japan is 1%, then the interest rate differential is 3%.
This means that an investor could earn an extra 3% by investing in US dollars instead of Japanese yen.
How can traders use Interest Rate Differentials?
The IRD is often used by traders to speculate on the future value of currencies.
For example, if the interest rate differential between the United States and Japan is positive, then it is likely that the value of the US dollar will appreciate against the Japanese yen.
This is because investors will be more willing to buy US dollars in order to earn the higher interest rate.
What is a carry trade?
Traders often use the IRD to engage in carry trades, a strategy where they borrow money in a currency with a lower interest rate and invest it in a currency with a higher interest rate, thereby profiting from the difference.
For example, if a trader borrows Japanese yen (with a low interest rate) and invests the borrowed funds in Australian dollars (with a higher interest rate), they can profit from the interest rate differential.
However, it’s essential to note that currency values can fluctuate, and the potential profit from the interest rate differential must be weighed against the risk of currency depreciation.
If the currency with the higher interest rate loses value against the currency with the lower interest rate, the trader could face losses despite the positive interest rate differential.
Interest rate differentials are an important factor in the global economy. They can affect the flow of capital between countries, the value of currencies, and the profitability of investments
