6 Factors that Drive the Trend in Forex Trading
Euro-USD Currency Pair
Forex is the world’s largest and most valuable market, dwarfing other financial markets like stocks, commodities, etc. Forex trading has continued to become more popular over the past few years. If you’ve opened a social media application or visited YouTube recently, you’ve likely come across numerous forex focused advertisements – whether it’s an app, platform, or trading course.
Given the number of online trading courses that exist, you would presume that nearly everyone was profiting from their forex trades. However, that isn’t the case. In most instances, you’ll likely find forex traders struggling to keep afloat because they continuously lose money, by making poor trading decisions.
Realistically, forex trading is more challenging than it looks. However, it’s not rocket science. It takes some time and effort to understand how the market works, which is, unfortunately, something many new beginners gloss over completely. They’re too fascinated with the prospect of making money, and as a result, neglect getting the required education.
The reality is that the forex world is complex and intricate. Since you’re dealing with foreign currencies from all across the globe, you have to be mindful of numerous things. Various factors can affect a currency’s exchange rate, meaning that currency pairs will subsequently be affected. Savvy traders making money from forex trading understand the factors to look out for when trading. They have a nuanced understanding of the forex market, and as a result, know when a currency pair will appreciate or depreciate. However, here’s something you must note: these traders were once in the same position as you. Therefore, if they can become profitable, so can you.
Foreign currency notes
Factors Driving Forex Trading Trends
Here’s a look into the factors driving forex trading trends. They include:
The Political Landscape
A country’s political landscape can significantly affect its currency. You’ll often see seasoned forex traders keeping a close eye on the political situation of a specific country because the political landscape also affects the government’s economic policies. For instance, a government trying to curry favor with the public before an election might increase government spending or lower taxation. This change in policy affects economic growth, and subsequently, the currency. For example, all you have to do is look at how Brexit impacted the British Pound. The Pound significantly depreciated after the UK announced it was leaving the EU. Typically, exchange rates tend to favor those countries that are fiscally responsible. Therefore, it’s crucial to watch the political landscape to determine forex trading trends.
Foreign Currency Trading
Inflation Rate
The inflation rate is another factor that impacts forex trading trends. If you’re well-versed in economics, you’ll already know the effect inflation rates can have on a currency. For instance, most countries with low inflation rates have appreciating currencies. While there might be some exceptions to the norm, this assumption generally holds. On the flip side, countries with skyrocketing inflation rates have declining currencies. In some cases, their currencies might essentially become worthless, as was the case for Zimbabwe in the late 2000s.
Generally, rising inflation rates result in higher price levels, meaning purchasing power falls in the country. As a result, it leads to downward pressure on a country’s currency because people are less willing and able to spend. However, sometimes inflation can also cause a currency to appreciate if the central bank increases interest rates to counteract inflation levels.
Interest Rates
Typically, the central bank is responsible for setting interest rates. Interest rates can significantly impact the economy and the currency. Low-interest rates urge people to spend more, while higher interest rates force them to save. Interest rates generally go hand in hand with inflation. The central bank will increase interest rates when inflation is high while reducing them when there’s low inflation.
Government Debt and GDP
Government debt and GDP are two crucial factors that impact forex trends. The Gross Domestic Product (GDP) is one of the best ways to assess a country’s economic performance because it measures the total goods and services the economy produces. Economies with higher GDP are more prosperous, meaning they’re producing significant levels of goods and services. As a result, their currencies usually rise. However, you’ll want to note that the GDP is a lagging indicator, meaning it only provides an assessment of trends and events that have already happened.
Likewise, government debt can also impact forex trends. For instance, a country saddled with debt is likely to seek assistance from the IMF or World Bank. Often, these countries require financial assistance to run the country smoothly. The World Bank and IMF might provide these countries with financial aid. However, in exchange, they might ask the government to change their monetary and fiscal policies according to the IMF or World Bank’s directive.
Terms of Trade
Terms of trade are another crucial factor that many forex traders often overlook. Simply put, terms of trade refer to the ratio between a country’s export and import prices. You can calculate the terms of trade by dividing the exports price by imports price and multiplying it by a hundred. It shows how much a country pays for imports and how much it receives for its exports. Countries with higher export prices are likelier to have a favorable Balance of Payments, and as a result, their currency appreciates.
Speculation
Speculation isn’t a measurable factor. However, it’s rife in the forex trading world. If there’s one thing traders and investors don’t like, it’s losing their hard-earned money. Traders tend to be careful of any negative news they might hear. For instance, if traders believea currency might decline, they’re likelier to sell it. Likewise, if they believea currency will appreciate, traders will see an opportunity to profit and demand more for it. Therefore, traders must detect the bandwagon effect and get ahead of it. You can hop on the bandwagon, but you’ll want to get off before the effect fades.
Euro notes
Start Trading Forex with Crystal Ball Markets
Would you like to start trading currencies? You’ll need an online forex broker to get started. Although many online trading platforms exist, not all are equal. Crystal Ball Markets is one of the best foreign exchange trading platforms. We’re a web-based forex trading platform that makes it easier for beginners to get started. Visit our website today for more information. Alternatively, you can register with us today to get started.