The introduction and availability of the FOREX Market to speculating traders have made a huge impact on the individual and on the market as well; with more investors around, the more volume to exchange in the market.

For newbie investors, it is very important to put some effort to understand the factors that may affect the currency rates in the market. These factors have been affecting the world's currency rates as well as the performance of some country's exchange rates as well. It may sound daunting, but investing on FOREX is one of the most stable forms of financial businesses since it is the best financial market due to its liquidity. Timing is the key to get a financial gain at one's investment in the FOREX market.

What are the factors that may affect and cause any change in the currency rates? As mentioned earlier, the FOREX market is the most stable market, but other markets that exist also affect the FOREX business. Stocks, for one is a market that could directly affect a country's exchange rate in different wave lengths, depending on the circumstances. For instance, a multinational corporation invests a huge amount for an offsite plant in a certain country. There is definitely a huge impact on the host country's exchange rate, giving it a direct gain.

Prices of goods also have direct impact on a country's currency rate. Rich countries that are abundant in sources such as oil and copper have long experienced the growth in their economy. Being the main resource of oil, other countries depend on the primary commodity that this country has, but in return, these countries are also depended upon for the economic impact they create.

A country's economic policy and status are important factors that may affect its currency rate. The determining factor of a country's economy is its financial stability that is geared off the possibilities of debt and deficit. However, nowadays many countries owe other wealthy countries in order to survive. The government's policies for economic growth and financial stability play an important role in order to stabilize its currency as well.

For newbie FOREX traders, it is a must to check on these direct-hitting factors for they pose much greater risks on the business of trading currencies. However, there is no reason not to trade currencies when these factors are present; it is all a matter of planning and timing in order to achieve one's objective of profiting.

Factors affecting currency trading -: Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange. Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.

Economic factors -: These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators. Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates.

Economic conditions include:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency.
Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

Political conditions -:

Internal, regional, and international political conditions and events can have a profound effect on currency markets. For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.

Market psychology
Perhaps the most difficult to define (there are no balance sheets or income statements), market psychology influences the foreign exchange market in a variety of ways :

Flights to quality: Unsettling international events can lead to a "flight to quality" -with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts.

Long-term trends: Very often, currency markets move in long, pronounced trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-trem price trends that may rise from economic or political trends.

"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or “overbought”.

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect - the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.