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Foreign Exchange Basics – The 6 Main Influences

 

To be successful in the forex market is necessary to understand foreign exchange basics. Technical analysis with charts and trends is one thing but it’s equally important to understand the fundamental reasons why the various currencies around the world are constantly moving relative to each other. Being able to understand what influences a currency movement and correctly predict a movement in one direction or another is what makes a successful forex trader. Let’s look at the 6 main influences

1. Current Affairs and the News.

Be aware of what is happening around the world especially within the major world economies. Monitor national and international news channels for such events as political unrest, social disorder and in particular financial news.

2. Unpredictable Events

A major natural disaster or significant terrorist activity can influence a sudden currency movement. You should always protect your trades from unpredictable events by using stop losses to minimize the affect of a sudden adverse currency movement.

3. Predictable Events

A political event such as a general election is predictable. A major international sporting event such the Olympic Games is predictable. The important thing here is to be able to understand which currencies are likely to be affected and in which direction they will move. It’s not just the events themselves which may influence a currency movement but also the announcement of such an event. So be aware of the timing of such announcements.

4. Financial Reports

Be familiar with the timing of financial reporting from countries of influence. Announcements concerning GDP, interest rates, inflation etc., will often influence currency movements. Monitor the financial results for the major international companies, particularly the banks and other major international financial institutions.

5. Rumors

It’s difficult to avoid rumors but you should be very careful if making a trade based on a rumor because very often a rumor is simply no more than just a rumor and often a rumor is spread to fool traders into thinking the market will move one way when in fact the opposite happens.

6. Currency Pairs

You should pay particular attention to applying foreign exchange basics in the two countries concerned with your currency pairs. It is fact that the US dollar has the strongest influence on other currencies particularly if one of the pair is a minor currency.

The problem for the beginner in forex trading is how to apply all this fundamental analysis to successful trading. The best advice I can give is to gain experience with fundamental analysis and how each type of influence effects currency movement before you use it to make real trades. After a while you will develop a feel which will give you more confidence as you become familiar with the foreign exchange basics.

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