For the novice investor who is interested in Forex trading, this article will provide them with some basic knowledge of the factors that affect this market.
Forex trading itself relates to the shifting of one currency price versus another and there is no other trading market in the world that encompasses what happens every day on a global economic scale as does the Forex market. No single cause or element influences currency valuation more than supply and demand. However, there are three categories of factors that have a direct effect on currency value movement:
Economic factors – the two most influential factors are a government’s central bank and their economic policies. The dissemination of these economic policies combined with current economic conditions revealed in economic indicators and reports all produce a significant effect.
Economic conditions are classified into four distinctly different categories including:
- balance of trade levels and trends
- Economic growth and health
- Government budget deficits or surpluses
- Inflation levels and trends
Furthermore, a government’s economic policies are normally comprised of its fiscal and monetary policies while the central bank is the major power that directly influences the supply of money and the cost of it. That cost is based on the government’s arbitrarily established rate of interest.
Market psychology – along with Forex trading perceptions, market psychology becomes one of the more influential factors based on the following aspects:
- Buying the rumors instead of selling the facts – this basically means that Forex trading values tend to reflect a specific market action before it occurs and then when it does occur, see the direct opposite of what was predicted actually happens.
- Economic numbers – a reflection of the economic policy that takes on the appearance of a “talisman-like” effect in the direction that the Forex market is traveling in.
- Long-term trends – relates to the movement of currency rates during Forex trading. Interestingly enough, cycles in business have an impact on currency rates despite the fact that currency trading is not “seasonal” like the retail business climate.
- Technical trading considerations – directional patterns in currency rates tend to form based on their movements within the Forex market. Studying price charts is typically the way in which these patterns are discovered.
- The flight to quality – when the political climate of a country becomes increasingly unstable, investors tend to seek out a safe haven for their money.
Political atmosphere – local, regional, and international factors can have some extremely profound effects in Forex trading. Political change and upheaval directly influences the direction of a currency’s price movement.
In closing, the individual who is just getting involved in the Forex market should gain as much knowledge of it as they can and the above information should help when it comes to immersing yourself in Forex trading.