In the FX markets, interest rates, trade flows, tourism, economic strength, and geopolitical risks all affect currency supply and demand. It is possible to profit from fluctuations in the value of one currency relative to another. Currency pairs are traded in pairs, so forecasting a decline in one currency is the same as forecasting a rise in the other currency in the pair.

A trader anticipates an increase in interest rates in the United States relative to Australia at a time when the exchange rate between the two currencies (AUD/USD) is 0.71 (it costs USD 0.71 to acquire AUD 1.00). The trader believes that when interest rates in the United States rise, demand for USD will rise, resulting in a decrease in the AUD/USD exchange rate as fewer, stronger USDs are required to purchase one AUD.

Assume the trader is right and interest rates increase, making the AUD/USD rate 0.50. This means that USD 0.50 is needed to obtain AUD 1.00. The investor would have profited by shorting the AUD and buying the USD.

Forex speculation involves buying and selling currencies to profit from fluctuations in their exchange rates. Speculators predict price movements based on various factors such as economic data, geopolitical events, interest rates, and market sentiment. Unlike long-term investors who hold currencies for extended periods, speculators often take short-term positions, aiming to capitalize on small price changes.

Forex is a highly liquid and volatile market, making it attractive for speculation. Traders use leverage to amplify their potential profits, though this also increases the risk. Success in forex speculation requires a deep understanding of market dynamics, technical analysis, and emotional control. While it can yield high returns, it’s also highly risky, and many traders can lose money without careful risk management.