When diving into trading, you need to be aware of some key parameters not only in the foreign exchange market but generally in the financial one. It is important to ask many questions if someone wants to become a well-qualified specialist. This concerns foreign exchange, too.
How to use leverage during operations? What is a margin in Forex trading? FBS, the online broker service, has the answers. The topics are divided by the professional stage of a specialist: beginner, elementary, intermediate, and experienced levels. That’s why anyone can find something appropriate.
Speaking about what factors affect the Forex market, the specialists highlight the following points:
- Politics:
- public statements;
- changes of the officials;
- government’s stability.
- Economics:
- GDP;
- inflation;
- debts and obligations;
- investments.
- Central banks:
- the finances’ circulation;
- interest rates;
- reserve funds.
- Natural disasters.
Let’s explore some of them in more detail.
The Role of Financial Factors
Changes in the government’s financial or tax policies lead to changes in the economy, which are reflected in the indicators of foreign exchange rates. When the government begins to interfere in various aspects of economic life or takes on additional international obligations, financial factors may take precedence over others. This is exactly what was painfully manifested in the case of the creation of the European Financial System (EFS) in the early 1990s. The realities of the market economy revealed the artificial nature of this event.
The Role of Discount Rates
Since foreign exchange trading, by definition, consists of the simultaneous exchange of two currencies, it follows that the system must also take into account two corresponding discount rates. This is the difference in discount rates (DR) — the fundamental factor of the market.
In practice, rates change unilaterally, resulting in changes in both the DR parameter and the exchange rate. Traders treat the discount rate like all other factors, trading on rumors and facts. For example, if the gossip says that the discount rate will be reduced, the corresponding currency will be sold before this fact takes place. An unexpected change in the discount rate is likely to cause a sharp change in the exchange rate (a sharp currency move).
The Impact of Political Events and Crises
While political events take place over some time, crises erupt instantly. Almost always, by definition, they come unexpectedly. Currency traders have a knack for responding to crises. Efficiency is essential here. Without a quick reaction, the trader risks big losses. You have no time for analysis in such a situation. There is only a fraction of a second to make a decision. The crisis threatens trade through a sharp decline in volumes. Prices peddle quickly, and the spreads between bid and offer jump from 5 points to 100 points. Returning to the market can be problematic.
The Takeaway
All financial activity planning is built on a parameters forecast. In accordance with it, decisions are made on where and in what volumes to direct investments, when to sell or buy your assets, what exchange to choose, and so on. It is also important to remember that all you get in this situation is just a prediction. The role of random or unaccounted factors, and their impact on the market conditions, is still solid.