Understanding the dynamics of currency markets
The forex market can be complex for some people. These are the forex trading basics worth knowing.
Foreign exchange (FX) trading is the unheralded king of the financial markets. However, participating in the foreign exchange, or forex, market is something that may be done by anyone who travels internationally and converts their local currency into another.
Despite the complexity of the market as a whole, trading currencies is actually quite straightforward. Here is a look at some of the fundamental forces that affect the dynamics of the forex market, and which can affect the outcome of your trading efforts.
Macroeconomic forces
Overarching macroeconomic issues are the primary drivers of the foreign exchange market. The value of a currency at any particular time is determined by these factors, which in turn affect traders’ actions when trading on a broker platform such as that offered by IFX Brokers.
The strength of a country’s economy is a major determinant in the value of its currency on the international market. The state of the economy as a whole can shift rapidly in response to breaking news and other factors. Most successful forex traders, however, are extremely self-disciplined and always follow the same trading plan.
Capital market forces
The state of the world’s financial markets is a good proxy for the state of the global economy as a whole. The dissemination of information in the financial markets is readily apparent.
Media outlets consistently provide near real-time updates on the activities of corporations, institutions, and governments. When assets from one country rise in value while those from another fall in value, investors should know that the outlook for that country’s economy has shifted.
Similarly, the commodity market is an example of a sector-driven economy. In the same way that forex traders rely largely on economic data, commodity dealers do as well. Both markets are susceptible to the effects of the same information in many instances.
Given the interconnected nature of interest rates and fixed-income securities and currencies, developments in the bond markets are also very relevant to the forex market.
Changes in yields have an immediate impact on currency prices because of their correlation to swings in treasury price. Therefore, to succeed as a forex trader, it is crucial to comprehend bonds, and particularly government bonds.
ALSO READ: 5 reasons to only trade with an FSCA-regulated broker
The effects of international trade
The trade surplus or gap between countries is another important consideration. The trade balance is a useful indicator of consumer demand for a country’s exports. The value of a country’s currency tends to rise when its exports are in strong demand abroad.
Large trade deficits indicate a country is a net purchaser of foreign goods. They are selling more of their currency to buy foreign currency in order to pay for imports. The value of a country’s currency that imports goods is likely to decrease in such a scenario.
The effects of political news
The political climate is a major factor in how a country is seen and, by extension, how valuable its currency is. Forex traders routinely keep an eye on political developments in order to foresee when national governments may shift their economic policies.
Government expenditure changes and changes in regulations affecting a certain industry are two examples. Margin and leverage changes for traders can have far-reaching effects on the markets.
