Speculation in Forex Market – Speculation Definition

Speculation in Forex

– What is Speculation in Forex market? The supply and demand balance between currencies is shifting continuously by countries’ economic strength, tourism, critical news, geopolitical risks, interest rates, trade flows, and many other factors. If one can foresee a currency will lose some value, it means the value other currencies that paired with it, will increase. So, there would be a considerable investment chance. The critical question is; How you can do that? We will talk about this here;

In forex, there are some speculative ways to take advantage of the changes in those factors. Some changes in certain countries will affect the value of the country’s currency against others directly. So, an accurate prediction about those factors would allow one to make a significant amount of money in forex.

Speculation Cases Examples

Let’s assume that you are expecting an increase in interest rates in Europe against the United States. Also, let’s say that the value of the EUR/USD pair (the exchange rate between Euro and American Dollars) is 0.8 during the time you will make your investment, which means that you can buy €1000 Euros with $800 US dollars. Your prediction about the interest rate increase would mean that the demand for dollars will increase as well. With higher demand, the value of the EUR/USD pair would decrease, and you could buy more Euros with the same amount of Dollars.

If we consider that your prediction about the interest rate increase is right and the value of the EUR/USD pair decreases to 0.5, so you can buy €1000 Euros with $500 US dollars. In this case, if you had sold a large number of Euros right before this change, and buy euros after the change, you would make a decent profit. For this example; 1000 Euros you sold before the change could be bought back as 1600 Euros without adding and dollars to your investment.

Other then predictions by following international news, reports and going through in-depth analyses about countries’ economies, there are also some ways to manipulate exchange rates. However, these methods are generally really extreme and only thinkable for just a small portion of brokers.

Some Other Speculation Examples

One of these speculation methods for changing exchange rates is, simple enough, manipulating them though over-trading purposefully. Some extraordinary investors can buy currencies in amounts so big that they can affect interest rates. They could still make a profit out of this act. Because when they start to buy significant amounts of a particular currency from the market, they create an upward movement in that currencies interest rate, this would trigger other brokers to buy more of that currency before it gets higher.

So, on a large scale, all these speculations would trade a high demand for that currency. At that point, the investor who bought this currency in extreme amounts at the start can sell all of it in different pairs and take advantage of the high demand. If they can sell their stock before the demand in the market burn out, they can make a huge profit.

Another speculation method is directly making investments in a particular country after stocking a significant amount of that country’s currency while it is weak against other currencies. By supporting the economy in ways such as creating businesses in the country, other international investors can be attracted to the subjected country. In the long game, the country’s currency would strengthen and provide a profit to the first investor.

Of course, there are also speculation ways to do otherwise; instead of strengthening the currencies, they could be weakened as well. Although this kind of speculation methods can be considered unethical, some bold investors could manipulate developing counties by affecting them in areas such as politics, public agenda, or even security.

These forex speculations are extremely difficult to pull for most brokers, or not acceptable for some. Still, they should be known by all traders in forex so when some movement that might be a result of these kinds of speculations, it can be recognized, and precautions can be taken.

I hope, you should have learned the basics of speculation on forex market. For more detailed explanations on this topic, you can check the related links belong to this website or other related websites, on this page.


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