One of the reasons many traders are drawn to FX, is that there are so many different approaches one can take when it comes to developing a trading strategy.

Currency valuations are driven by many factors, chief among them probably being interest rate differences. A nation offering a higher interest rate than its trading partners will tend to see the value of its currency rising as investors sell low or non-yielding currencies for higher yielding ones.

Then you have economic performance. A country exhibiting robust growth, with rising GDP, and a healthy labour market, will tend to have its currency outperform trading partners that may be experiencing economic contraction and unemployment.

A country that is comparatively more indebted, can also see its currency depreciate relative to a less indebted nation. These data are crucial to a certain contingent of FX traders who follow economic data releases closely and trade the volatility surrounding them.

But currencies also exhibit other features and allow investors to gain exposure to the changing tides in other markets. For instance, currencies like the Aussie dollar (AUD), the Canadian dollar (CAD), and the New Zealand dollar are tightly correlated with certain commodities and so offer a means of exposing a portfolio to those assets without trading them directly. The Australian dollar is often traded as a proxy for gold, and the Canadian dollar for oil.

Then you have the US dollar, that can be played as a bet on the US economy, but also as a risk-off asset. We often think of gold as the ultimate safe haven, but investors will tend to cash-out to the US dollar en masse when they feel there’s an uncertain path ahead.

All the above just scratches the surface of the intricacies of trading currencies, but the trick is to start small, with a pair that you’re familiar with or interested in, and gradually build your general knowledge around it. Those lessons can then be applied to other currencies as you gradually broaden your focus and start to understand the ebb and flow of how currencies perform against each other.