Forex stands for Foreign Exchange. It is the biggest financial market that determines the price and exchange rate of every currency in the world. In this market, people buy and sell currencies as an asset, by the means of exchanging them for one another.
The Foreign Exchange Market, unlike other financial markets, does not have a particular location for all the financial transactions. That is because the Forex market is not a place or a building. Instead, it is a stream of networks formed by all of its participants, namely the liquidity providers such as banks and financial institutions, as well as brokers and retail traders.
Most financial transactions in the Forex market are done using the OTC system, or over-the-counter, which means that the buyers and sellers will conduct their transactions directly in the market without any supervision from an exchange or a liquidity provider.
Furthermore, since the Forex market is essentially a system that involves different parties from various nations, it is a market that seldom sleeps. From the United States and Europe to Asia, you can find any market open at any time on weekdays as long as the sun is in the sky.
Now that you have a little bit of understanding about the Forex Market, can you imagine how vast this market is and how much potential profits can be offered by this massive network?
The Forex market is currently considered the largest financial market in the world, with a daily turnover of over 5 trillion USD. Moreover, the myriads of participants make the market both highly liquid and highly volatile. That is why you need to completely understand the factors and circumstances that move the market. That way, you will know how to formulate the best strategies and make the best decisions for your daily trades.
What Moves the Forex Market?
Over the years, countless new traders folded and gave up their journey in the Forex market for many reasons, such as lack of progress, an insufficient amount of capital, and encountering scammers.
These incidents are quite unfortunate, but they can be easily avoided if you get a basic understanding of how the Forex market moves and what factors contribute to its directions.
In reality, there are countless situations and factors that affect the Forex market movements, but you can start with the following aspects:
1. Supply and Demand
When it comes to trading and business, the basic economic principle, i.e., supply and demand, plays a pivotal role. The comparison of supply and demand will always determine the value of an asset.
When the number of demands is larger than the available supply, then the value of the asset will increase.
On the other hand, when the available supply is higher than the demands in the market, then the value of the asset will decrease.
Let’s assume, under normal circumstances, the price of a certain medicine is around 3 USD. However, when there is a sudden epidemic, that medicine becomes an immediate need. Everyone wants it, and some people even buy the medicine in bulks because they are afraid that they will run out of supplies. Therefore, because the demand for the medicine is exceptionally high, the number of medicine available in the market becomes limited, increasing the price to over 6 USD.
Now, after the epidemic is over, some people might still need the medicine, but the total demand decreases because people are not so eager to buy them anymore. Yet, shops may still have a lot of remaining supplies from the epidemic. In this case, the price of medicine will probably decrease to around 2.8 USD.
The same thing happens with currency trading. When the demand for one currency increases, then the price of that particular currency will go up due to its perceived value. But if the supply of the currency is higher than the demand, then the currency price will go down.
2. Perception of Value
It may be easier to count the supply and demand of other assets. But with the currency market, you cannot determine how much of one currency is available in the market. Even though many aspects determine the supply and demand of a currency, the perceived value of the currency remains among the most critical elements.
As you know, in the Forex market, currencies are always quoted in pairs. It means that the value of one currency will always be measured based on another currency. At the moment, the USD is the most popular currency and used as a comparative measurement because of its dominance in the international market.
The price of a currency changes when the market’s relative value of that particular currency is changing as well.
For example, in a particular market, the value of 10 apples is equal to 1 banana. So if you pay with one banana, you get 10 apples in return.
Out of the blue, John Hopkins University publishes medical research claiming that apples contain a crucial element that can highly boost your immune system.
As a result, everybody is now talking about how great apples are, and they want to buy more.
In this case, we can say that the perceived value of apples increased, so if you pay with 1 banana, you can no longer get 10 apples. You probably get only 5 or 6 apples.
The same thing applies to currency pairs. If the market’s relative value of a particular currency is positive, it will increase the currency price. At the same time, if the currency’s perceived value is negative, then the price of the currency will drop.
3. Economic Events and Announcements
So, how do you determine the perceived value of a particular currency pair? By constantly monitoring any information and news regarding that specific currency.
A country’s economic news and announcements, such as the Gross Domestic Product (GDP), employment rate, retail sales, and consumer price index will highly determine the price of its currency.
When a country’s economy is in good condition, it will increase the perceived value of its currency. As a result, the demand for the currency will increase, and the price will rise.
4. Central Bank Policies and Interest Rates
Aside from the economic events and announcements, there is also the Central Banks that play huge roles in determining how the Forex market moves. Depending on how the events/announcements affect a country’s economy, Central Banks will revise and change their policies to create an equilibrium.
There are many different actions a Central Bank can take, and these actions can have different effects on the value of a currency. Still, the key actions are usually related to adjusting the interest rates according to the country’s economic situation, as well as performing an intervention when the price of the currency increases/decreases in a way that it affects the country’s economy.
5. Traders’ Sentiment
Some people may consider it trivial, but traders’ sentiments can also affect the price of a currency.
Let’s say a group of traders sell the same currency at the same time in an amount so huge that it becomes noticeable for other traders. This will create a chain reaction, resulting in more traders selling the same currencies even when nothing is really happening.
Cases like this will only last for a short period because the above factors will usually counter the effect. Still, in that short time, the price of the currency will fall, thereby affecting other traders and the country’s economy.