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Forex Trading Education 101: Factors Affecting The Market
You can count with both hands the number of people who you know understands the mechanics of the forex market. On the other hand, you can count with one hand those who actually invest their money on it. As it is, there are a number of reasons why trading in the forex market seem difficult and complicated:
1. The Variety of Factors Affecting the Market
The forex market is affected by many factors: political, economical and even international.
Economic factors such as the inflation rate, the balance of trade, and the government budget surpluses or deficits, as well as the over-all state of the economy have an effect on the forex market. Even such figures as the GDP or Gross Domestic Product, the retail sales, the current employment levels can have an impact on the movement of a traded currency.
Political factors, on the other hand, can also influence the trading power of a currency. Signs of political instability such as coup d' etat and political upheavals can have a very negative effect on the traded currency.
International events like the Olympics or an international beauty pageant like Ms. Universe can create a positive image for the country and increase the value of its currency while being traded.
2. Instability of the Forex Market Because of Market Psychology
Economic and political factors are not the only things that can affect the forex market. There is also what we call market psychology. Market psychology is basically the power of trader perception. Traded currencies can be influenced by the mere behavior of the trader's money. The following are some of the forex trading concepts essential to understanding market psychology.
a. Flights to quality. This happens when the market is unsettling for traders that they start to panic. They then seek refuge to a more stable currency.
b. Long-terms trends. If traders understand long-terms trends then they can schedule the buying and selling of target currencies in time for the periodic business cycles. Business cycles do have an impact to the power of a currency.
c. The phrase "buy the rumor, sell the fact" is popular in the trading circuit. Currency price can reflect the effect of a specific action before it even happens. However, when the action indeed happens, the movement of the currency makes a reverse. This is quite a pattern in recent years of trading and should not be underestimated.
d. Economic numbers are also used by traders as an indication of the market status. Economic indicators such as money supply, trade balance and inflation figures have all come into play at one time or another.
e. Technical trading patterns are also used to get a bearing of the forex market. This is an essential part of forex trading strategies and methods. Currency pairs such as EUR/JPY can take a pattern that experienced traders can observe in time. Using this, they are able to make the right move at the right time.