Trading on the Forex market is complex and risky but some simple principles and news to watch can help demystify the process. The foreign exchange market, commonly called the Forex or FX market, is popular with speculators because of its enormous size, liquidity, and the tendency currencies have to move in strong trends, according to Dr. Glen Brown in The Principles of Foreign Exchange Trading.
“Unlike other financial markets, investors in FX can respond to currency fluctuations caused by economic, social and political events day or night as the market is open 24 hours a day,” Brown said. “Trading begins each day in Sydney and continues uninterrupted throughout the day as major financial centers around the world open their books.”
The decentralized FX market is considered an Over The Counter (OTC) or 'interbank' market, because transactions are conducted directly between two counterparts, not on an exchange, as with the stock and futures markets, Brown said.
Forex Trading Affected by Government Economic Reports
Currency prices reflect the balance of supply and demand for currencies. Two primary factors affecting supply and demand are interest rates and the overall strength of the economy. As with a stock investment, it is better to invest in the currency of a country that is growing faster than its rivals.
Economic indicators such as GDP, foreign investment, and the trade balance reflect the general health of an economy and may affect the underlying shifts in supply and demand for that currency. A tremendous amount of data is released at regular intervals by every global government, some of which is more important than others. Data related to interest rates and international trade is looked at the closest, Brown said.
FX Markets Watch Fed Reports Carefully
A country’s currency sometimes rises and falls seemingly at random, but basic macroeconomic principles are behind the fluctuations. Traders intently watch the activities of country’s central banks to detect changes in monetary policy.
For example, in the United States, only the Treasury Secretary and the Federal Reserve chairman can make official statements on the US dollar. Therefore, Fed reports and speeches by Fed governors and the Treasury Secretary are parsed in exquisite detail to glean hints of where monetary policy may be headed.
The major Fed reports that move global equity and currency markets are the report from the Federal Open Market Committee, which holds two-day meetings eight times a year, and the Fed’s Beige Book, which outlines economic conditions in various regions of the United States. The FOMC report usually states what the Fed intends to do with interest rates and whether the overall economy is expanding or contracting. Lower interest rates stimulate economic expansion; higher rates cool an overheating economy and curb inflation.
Simple Principles of Foreign Currency Trading
Here are some other basic principles:
- If a country’s stock market is rising, it currency usually rises as well.
- In general, globally money flows toward higher interest rates.
- Economic recessions make traders of all stripes risk averse. This is usually good for the US dollar, which is seen as a safe haven.
- The US dollar and gold usually move in opposite directions.
Lyda Phillips - Lyda Phillips is an award-winning journalist, novelist and screenwriter. As a reporter for daily and weekly newspapers and United Press ...
