Monday, October 1, 2012

What Moves Forex

I) Fundamental Analysis

Fundamental analysis involves the assessment of macroeconomic indicators, economic growth (capital and trade flows) and geopolitical risks when evaluating the value of a currency relative to another. These forces drive the supply and demand of money.

Major macroeconomic indicators include the Gross Domestic Product (GDP), interest rates, inflation, unemployment, money supply and foreign exchange reserves. Economic growth comprises capital flow and trade flow. Geopolitical issues have an impact on people's perceptions of a country's level of stability and of the ability of a country's government to deal with the political issues at hand. In addition, central banks in various countries may occasionally intervene in the forex market to adjust the value of their currencies, either by increasing domestic currency supply in an attempt to lower the price or by buying their domestic currency in order to raise the price. Sometimes, instead of making physical adjustments, their interventions may come in the form of hints or threats so that the market can pay heed and obey accordingly.

The most dramatic price movements, however, occur when unexpected fundamental events happen. Such events could range from a central bank raising domestic interest rates to the outcome of a political election or even an act of war.

Since the market is made up of players, and it is the players' emotions that determine price actions, the key driver of the currency market is their expectations and perceptions surrounding the event, rather than the event itself.

It is thus essential for Forex traders to be aware of not just the economic releases of the week, but also the larger-scale of macroeconomic events that are happening around the world because they move the market in a huge way.
II) Technical Analysis
The application of technical analysis to foreign exchange markets is a recent hot development in trading due to the advent of new technologies.
Technical analysis is based on the assumption that all information is already included in the prices. After all, the price at any given time is the sum of the knowledge, fears, hopes and expectations of the people already in the market and those contemplating getting into it.
How might those bystanders affect the price? Let’s say if they hold back from buying EUR/USD, they are keeping the price lo wer than it otherwise would be.

One feature of the market is its
discounting mechanism, and it is one of the main reasons for using technical analysis. The market does not actually predict anything, but it reveals what the major market players like hedge funds or trading pros think.

When the forex market anticipates robust economic growth, players become willing to pay more for the country’s currency, and this drives the currency higher. Conversely, when market players expect a slowing economy, they become less willing to bid for the country’s currency if they think that there would be less demand for it as a result. Hence, market participants have already factored in today’s news into the prices, and begun to anticipate tomorrow’s breaking news. In addition, technical analysis works under the assumption that history tends to repeat itself.

Technical traders use charts, trendlines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities, based on historical currency data.

Technical analysis works especially well in the forex market because short-term exchange rate fluctuations are primarily determined by human emotions or market perceptions. Perception as reality is very true, and this concept manifests itself strongly in the markets. If you think that a currency is worth x amount against another currency, then it will be what it is worth.

The art of technical analysis is to try to identify trends at an early stage, and
always assume the prevailing trend is intact until proved otherwise by reversal signals.


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