Winning the Speculating Game
Currency speculators are the fortune-tellers of the Forex market. Arguably, they are also the fortune-makers. Although they don't directly affect the fluctuation of exchange rates, their actions do serve as catalysts that could either cause a currency crisis or keep the market healthy with liquidity. Hence, reading the telltale signs and correctly guessing their next move could save you a lot of money.
Fortunately, speculators tend to be predictable. To put it blithely, they are worrywarts and speculating that a country's exchange rate would go down due, for example, to an earthquake, they will short sell their dollars and buy euro in the hopes of earning a profit when their prediction eventually comes true. Of course, the earthquake itself will not cause the dollar to fall so bad. Rather, the multiple short-selling will cause inflation and so become the reason for the depreciation.
This speculative mindset can be likened to panic-buying. Suppose that a radio station announces a coming signal number 4 typhoon, people will flock to the supermarkets to stock up on canned goods, flashlights, batteries, and the like---fear will cause them to buy much more than they need. Unfortunately, their doing so would create a shortage on the supplies; that and not the typhoon would then become the root of the problem. In any case, the circumstances will end up with worse results. But since you cannot change the minds of the people around you, your best bet is to go for a preventive measure to protect yourself.
To do this, first get a general idea of what a speculator is thinking by learning to live by their rules: think ahead and think fast.
As a currency trader, understanding the way the speculators think is your cue to what action you should take next. If something as big as 9/11 couples with ongoing civil conflict, expect that there will be a massive short selling of dollars. Knowing for sure that the dollar rate will sink hard and fast, don't join the short selling because that will further plunge the economy to crisis. The wisest thing to do would be to refrain from currency trading until the crisis has passed. Save yourself and let the banks work on stabilizing the market first. After all, you can't play the game if there is no playing field.
Speculators have much influence in the Forex market. By keeping in mind that fear and profit motivates them, you too can predict and protect yourself from the direction which the exchange rates will inevitably take. Think even farther and remember that the healthier the market, the more profit you will get.
