This is a great question and once you master this relationship it can really enhance your trading. Interest rates are a key driver of a currency’s value. Let me explain. Say the economy is doing well. Growth is picking up, the labour market is tightening, and consumers’ are spending their hard-earned cash. This starts to weigh on inflation as demand in the economy increases so to do price pressures. A central bank’s role is always to remove the punch bowl just as the party gets in to full swing, so when the economy starts to look good central bankers usually begin raising interest rates to slow things down a bit so inflation doesn’t get out of control.

A currency’s worth is based on what it can earn from interest – when interest rates rise relative to elsewhere more foreign investors are attracted to the currency. More people want to buy it and this adds to the upward
pressure on the currency.

Interest rates also affect the supply of a currency. When a central bank hikes rates they are essentially withdrawing money from the economy, reducing supply and increasing demand – thus its value rises.

The same works in reverse. So when rates fall more money flows into the economy, supply outstrips demand and its value falls.

Generally, in normal economic conditions currencies with higher rates of interest will tend to out-perform those with lower rates. Of course, there are exceptions. For example, if interest rates are rising because investors
are worried about the solvency or credit risk of a country then the currency is likely to fall.

The Aussie has benefited from high interest rates, but is vulnerable if the RBA starts to think that conditions in the economy are cooling sufficiently to be able to start loosening monetary policy.

There have been plenty of people who have called the euro’s demise during the sovereign debt crisis and so far they have all been disappointed. The euro has been surprisingly stable ever since the Greek debt crisis when it
toppled 10 per cent in a month.

There are three main reasons for this in our view. Firstly, European leaders have pulled together leaving little doubt that the currency bloc will continue to exist. Although they have made a hash of finding a long term solution to the debt crisis, investors are confident the single currency will exist in the future.

Secondly, the larger peripheral nations that were on the list of financial blow-outs 6 months ago including Spain and Italy have stepped back from the edge and no longer look like they are in danger of requiring a bailout. This is
reflected in the falling cost to insure Spanish and Italian government debt.

With these two economies out of harm’s way, an EUR11 trillion economy like the Eurozone can easily suck up Irish, Greek and Portuguese liabilities. This has calmed investors’ nerves and reinforced the staying power of the
currency bloc.

The last reason for euro strength is the timing of the crisis. Although some of the peripheral states are suffering Europe’s core economies are extremely strong. This is fuelling inflation and thus rate hike expectations for the
Eurozone. The interest rate differential between Europe and the US is currently euro positive. So although peripheral credit markets are under immense selling pressure, the euro is benefiting from the prospect of an ECB tightening cycle. In a global environment of low yield investments this makes the single currency extremely attractive.

That is a great question since position size is one of the most important things that a new trader needs to get right in order to be successful. If a trade position is too large for your account balance then you can get wiped out in an instant especially if the market is moving quickly, which is most of the time in FX. So your nominal position size depends on the amount of money you have in your account.

A good rule of thumb is to follow the money managers. Most managers won’t risk more than 2 per cent of their capital base per month. Since retail traders have smaller capital bases than the average fund manager if you decide that you want to risk 20 per cent of your $1,000 capital base per month and you want to trade once a week then you will only want to risk $50 per trade.

Mini contracts (for example in FX a mini lot size is 10,000) are good for smaller traders. To calculate where you need to put your stop if you want to buy USDJPY at 80.80 you would need to calculate the value per pip (0.01/USDJPY rate 80.80) X lot size (10,000)), which is $1.20. Since you want to risk $50 per trade you can afford to run a 40 pip stop at 80.40.

Each trader has their individual tolerance for risk depending on their own circumstances, but using this rule is a good way to manage your money, no matter how large your account size.

In the past this would be easy to answer as there were only a few pairs available to retail traders so the decision was made for them. But as the emerging markets gain in significance and become central to the global economy we offer our clients access to the most liquid emerging market currencies along with the major currencies and we now offer more than 45 currency pairs.

Obviously any trader, especially a novice, would get dizzy trying to analyse all of these currencies so we recommend that a beginner focuses on just three or four currencies and tries to follow their progress in the markets. A couple of dollar crosses like euro-dollar and sterling-dollar are always popular, but recently the Aussie dollar has been extremely popular due to its correlation with growth in China.

Essentially you want a compelling reason or story to trade a particular pair. For example, Australia’s proximity to China, the Eurozone debt crisis eventually weighing on the single currency or a dollar rebound on the back of a strong US economic recovery. Read about these pairs in the financial press if you can and then try and track their progress using charts or looking at prices to see which currencies are strong or weak.

Then we recommend trading on a demo account to get a feel for how the systems work and what it feels like to actually trade in real time.

There is no perfect time to trade since it is up to the individual and their circumstances. You need to be able to make trades without being distracted – so the middle of a meeting at work or cooking dinner for your family may not be the ideal times. Other people use our app on their smart phone and do it on the way to work or in their lunch hour. Others wait until before they go to bed.

If you can’t trade at exactly the time you want to then you can leave a 'working order',  which means you can buy or sell something at a particular level if you won’t get time to trade yourself. This is especially useful if you want to trade around an economic data release, a central bank meeting and so on.

Overtrading, overtrading and overtrading again. When novice traders first get a taste for the markets they tend to think that a moment not spent trading is a moment wasted. That is not true. The best traders take a careful approach and remain disciplined. So the next time you want to trade or play around with your stops – ask yourself why you are doing it.

The trick to being successful is timing. Some of the best traders spent more of their time analysing markets, reading reports and looking at charts to make their move at the right time; for example, when the trend is changing or momentum is building. That is the way to book profits. Overtrading is the way to amass losses, and plenty of them.

There is no simple answer to this. The run up in the Aussie dollar for most of 2010 could be explained by several logical factors including strong economic growth, proximity to China, commodity prices and of course the RBA’s rate hiking cycle. But the break out above the 1.0150/60 level in the middle of March doesn’t correspond with an improvement in Australia’s economic fundamentals.

Two things worry us about this rally to new record highs: firstly that the Aussie dollar has diverged from its own fundamentals. The interest rate differential between Australian and US 2-year government bond yields has started to narrow, i.e. US short term yields have started to outpace Australian short term yields. So as the Aussie is cracking new highs it is also losing its yield support.

Secondly, the Aussie dollar moved closely with the Chinese stock market until the start of this year. A positive correlation between Chinese stocks and the Aussie makes sense. The Asian powerhouse is Australia’s largest export partner and has been pivotal to Australia’s strong growth and terms of trade in recent years. However, since the start of the year Chinese equities and the dollar have had very little correlation of note.

The stock market is coming under pressure as investors fret about the impact of Chinese authorities’ tightening monetary policy to cool growth; however the Aussie has been able to shake these fears off. But if growth in China slows and its demand for raw materials dries up, the Australian economy would be hit hard along with the dollar.

So what is driving these record highs? Risk appetite. The market is dumping low yielding treasuries and piling into risky assets as the global growth outlook improves. This is fuelling Aussie strength rather than domestic economic fundamentals. While risky assets are moving together then the Aussie is likely to go along for the ride, but if there is a sudden shift in risk sentiment the Aussie could come back to earth with a bang