real economic phenomenon. Impact of Inflation on Forex World currencies are extremely sensitive to price fluctuations. If a nation's currency is inflated heavily, it lowers the total value of that currency. This makes the currency weak and a bad buy for forex traders. However, deflation isn't always good for forex traders either. Deflation is the process by which money is removed from the banking system through an economic slowdown or through taxation. If deflation is severe enough, the forex market might see this as a sign of a weakening economy entering an economic depression. While fewer currency notes in circulation means a higher value per bank note, it might also signal low aggregate demand in the marketplace. Persistent, but low, inflation rates might also signal the same thing. How to Make Trades Based on Inflation Signals Forex traders make money off of the volatility in the marketplace. Usually, it's not so much the inflation itself that's bad for forex traders but a significant deviation from projected inflation. Governments acknowledge inflation and publish data on it every quarter. Forex traders look for rapid changes in the inflation rate, or deviations from earlier predictions. If inflation deviates from the expected rate and is higher than expected, it signals an economy whose purchasing power is quickly eroding. If the inflation rate is lower than expected, this signals a lack of demand in the marketplace and a possible depression or recession. Forex traders should set firm buy levels and stop losses that take into