Factors of Influence in the FOREX Market
The previous example highlights the fact that there are many factors that can influence FOREX markets. As such, it’s important for you to do your research before jumping into any sort of trade. Most importantly, you need to be aware of the dangers and risks that come with investing in FOREX without understanding the underlying fundamentals supporting the deal you are making.
That is why we are going to look at technical analysis and fundamental analysis as it pertains to the FOREX market.
Technical Analysis
This is the most common research approach in FOREX. Technical analysis consists in the use of statistical tools and models to analyze the behavior patterns of individual currencies and currency pairs. With technical analysis, you can relatively predict the shifts in exchange rates, particularly if you have a great deal of information to work with. As such, you can construct models that will help you make decisions on what currency pairs to invest in and how you can determine how they will work out.
With technical analysis, you will need to read charts and graphs. These charts will reveal the type of information you need to digest in order to place deals. Such information includes trading volume, exchange rates, and trends.
Speaking of trends, recognizing trends is the single most important aspect of FOREX trading. When you learn to recognize trends, you can determine what a currency’s valuation might be at any point in the future. Most importantly, you won’t be guessing at what price shifts might occur. In fact, you may find yourself making reasonable assumptions based on the information you have analyzed.
When analyzing trends, you will encounter the term known as a “moving average.” A moving average consists of the average exchange rate over a given period of time. For instance, you can calculate the moving average by determining the average exchange rate every hour over the course of two trading days. This will provide you with a glimpse of the currency’s behavior.
By the same token, trend can help you determine if it is bullish or bearish. A bullish trend means that that one currency’s value is gaining in relation to another. A bearish trend means that one currency’s value is diminishing in relation to another.
On the whole, technical analysis is considered to be the cornerstone of FOREX investing. When you are able to harness the power that comes with this kind of information, you will be able to make sound investment decisions every single time.
Fundamental Analysis
The other core element of FOREX market analysis is called “fundamental analysis.” Fundamental analysis takes into consideration political, economic, and social factors that might affect a currency’s valuation. Please keep in mind that the valuation of a currency depends on a country’s overall situation more than what investors perceive to be the value of a currency. In fact, investors will look to the relative stability of a country as an indicator of a currency’s value.
This is why the US Dollar, the Euro, and the Swiss Franc are all considered to be “safe” currencies. On the other hand, when you have a country that does not have a stable political situation, you will find that investors will try to avoid putting too many assets into that currency as there is no guarantee where that currency’s valuation will head.
Moreover, political factors can literally make, or break, a currency’s valuation. Earlier, we highlighted how oil prices can tank a currency’s value. Additionally, currency may be propped up by news of strong economic data. This implies that countries that receive positive reviews from economic forecasters may find their currency experiencing an increase in its value as investors will perceive it to be “safer” as opposed to other currencies which may lack greater backing from their country’s government or economic outlook.
So, it’s best to keep an eye on social, economic, and political news as being aware of these factors can keep your investments safe while avoiding serious losses.
