| Expecting to make 100k dollars in the stock market in a month? | Forex Volatility and Market Expectation |

Volatility, or the tendency for fluctuation that can affect your
earnings within the stock market, is typical within a
domestic market but even more evident and much stronger
on the Foreign Exchange Market. What factors affect the
value of currency on Forex, and is there any way to control
this?

Devaluation And Revaluation

As mentioned devaluation refers to
the purposeful decline in value of a currency in relation to
other currencies as charged by a government entity. For
example, if the U. S. dollar is worth ten units of a foreign
currency that is then devalued by ten percent, the U. S.
dollar is now equivalent to only nine units of the foreign
currency. This makes any items purchased in the foreign
currency more expensive for those trading in U. S. dollars,
as the exchange rate is lowered. It also makes items in the
foreign country less expensive to trade in U. S. dollars.
An opposite change in value can also occur, raising the value
of the foreign currency. This is referred to as revaluation.
While it may seem that purposely adjusting the value of a
nation’s currency is “cheating”, or taking an unfair
advantage by making foreign products cheaper to purchase
and increasing the value of exports, there are regulations in
place to prevent the manipulation of exchange rates for such
purposes.
The charter of the IMF (International Monetary
Fund) assists in prohibiting such occurrences and enforcing
the policy.

There are ways in which you can take advantage of
devaluation and revaluation, which will be discussed later
on. However, what happens when the value of a foreign
currency changes due to market fluctuation rather than
purposeful reductions or increases by a federal government
or federal bank? What effect do appreciation and
depreciation have on the stock market?

Appreciation And Depreciation

Depreciation can be easily related to the life of a car. As
soon as you drive a new car off the lot, the value is almost
cut in half. This is extreme depreciation. However, over the
next few years, the car continues to lose value at a more
gradual pace. This is considered to be depreciation as well.
Currency appreciation and depreciation are changes in the
value of the currency that are driven by market forces rather
than by government mandate. For example, in an attempt
to repay certain loans, in 1998 the Central Bank of Russia
announced the coming devaluation of the ruble. The
exchange rate, which was currently six rubles per U.S.
dollar, would over a period of time change to 9.5 rubles per
dollar, effectively a depreciation of 34%.

However, prior to the change, there was a widespread panic
within the former Communist nation, and the value of the
ruble dropped due to many people in Russia opting to trade
in their securities prior to maturity. In a single day,
following the announcement, the Russian ruble was
depreciated by an amazing 25%.

The same sort of crisis occurred in the 1920’s with the crash
of the U.S. stock market. In that time, a nationwide panic
set in, and people rushed to the banks to withdraw cash that
was not available or to trade in securities and stock options
that were not matured. In running to the bank, people
actually caused the crash rather than escaped it.
On the flip side of the coin, too fast of an appreciation sets
up a country for inflation, or an increase in the retail value of
products sold to the public based on currency valuation.
While inflation is bound to occur, it can be minimally
tempered through the use of the currency valuation.
Appreciation can be related to a vehicle as well. Often, men
enjoy taking old cars and restoring them to their original
beauty. In doing so; they drastically increase the value of
the vehicle or appreciate it.

The ever changing rates of currency conversion and volatility
of the market create an inherent market risk, or a day to
day potential to experience loss due to fluctuation in
securities prices. There is no way to diversify this type of
risk, as it is always going to affect investment to a certain
degree. However, some risk can be offset by particular
types of investments or ways of investing that are more
secure or protected.

We will take a look at long and short positions, short selling,
stop orders, and other ways to protect your investments
from drastic loss in additional chapters. These options
include the ability to preset your purchase or sell price for a
specific commodity, as well as using various predetermine
order levels to place orders and complete transactions.
Of course, do not delude yourself into thinking that you can
rid yourself of all possible risk factors on the market. There
is always a cloud hanging over your head waiting to burst,
and all it takes is one little pinprick. You must always
exercise caution, though the idea of playing the stock
market entails danger and excitement inherently. The next
chapter will help you get a grasp on reality and what is
involved in balancing your risk factor with a grounding in
reality; your ego with your id.