Why does Forex market move?
What makes the price move in Forex market? Maybe you have been asking yourself this question, but never really had an answer. The price in currencies move because of supply and demand, when there are more buyers than sellers, the price is pushed up higher, the price is pushed further down when there are more sellers than buyers in the markets. But maybe the big question to ask should be, why are the buyers more than sellers, or why are there more sellers than buyers?
Why do we buy?
We buy because markets perceive that the currency that we intend buying is more valuable than others, for an example, markets perceive that the Canadian Dollar (CAD) is more valuable than US Dollar at that time, then more investors would be buying the Canadian Dollar (CAD) against the perceived weaker US Dollar (USD). The real question that we should be asking here is, why do markets think that the Canadian Dollar is more valuable than US Dollar? The real reason is fundamentals/news, no economic news, no perception and no movement in the markets and the value for each currency would be fixed, got that? Central banks are the most important voice in Forex market.
Most traders would argue that trading fundamentals or news does not work because the effect does not last, but it is the very same effect that does not last that wipes their accounts. And this post came at the right time when south Africa is facing the shocking weakening of the Rand due to some speech by our president which resulted in our currency depreciating heavily. I had a discussion with my trader friend and she made me laugh when she said “”WHO SAID WE WANTED THE EFFECTS TO LAST”” and she made a valid point, the only thing that we want is to profit from it and if it doesn’t last, we are still ok with it because we know it is short-term and we are very aware of that, and we will also know when it changes (short-term again) and we can follow the new direction and bank on it as well, yes I agree that the fundamentals are more of a long-term and the effects or the results may last for few minutes to few hours, but the sentiments are the “”NOW”” and that short-term price move does affect open positions/trades which are opened prior to an economic news in a big way, and mostly in a negative way, the price moves are short-term but they can be very hectic and deadly, just imagine what happened to a trader who was SHORT (SELL) on USDZAR at the time the shocking news hit the markets, the price move was not random, it was due to the news.
A lot of times traders are faced with this dilemma of being thrown to the wrong side of the market while they were so convinced of their trades and all criteria that they usually check before entering a trade were met, it becomes so confusing I know, the next thing that traders do, is to blame their system and change it only to find out the problem persists. If you are a day trader and you are trading shorter time frames ranging from M5 to H4, I think it makes sense to just pay more attention to the speeches and the daily news because when the news results are released, the sentiments in the markets change and take over and you get affected, you must consider this, it might help. The traders who are not affected by the short-term price move that happens as a result of an economic event are those who are trading weekly charts or even monthly charts. Mostly those who are telling you that the news do not work are longer time frame traders, but they forget to tell you that they do not trade shorter time frames as you do, the time frame makes all the difference.
The question that you need to ask yourself is simple, are you a long time frame trader or a short time frame trader, If you are not trading a daily, weekly or monthly time frame, maybe it is about time you pay more attention to daily market sentiments, you can benefit a lot from it, I have learned that as a day trader I needed to pay attention to the daily news as I was mostly affected and stopped out and thrown to the wrong side of the markets as the news happened, yes it is short-term and so is a trader who trades anytime frame below daily, weekly or monthly.
Categories of news that contributes to currency movements
- And a lot more other speeches by government
All major currencies interest rates are controlled by the government or independent organisations that reports to the government. If the inflation is high, the interest rates will be raised to slow down the economy, higher interest rates mean higher costs to borrow money, higher costs on the monthly credit card bills, higher costs to buy a house etc. and the economy slows down, by increasing the interest rates, the value of currencies also increase
Higher interest rate=higher inflation=higher currency value
Lower interest rate=lower inflation = lower currency value
- Every currency pair moves differently
- Use correlations to other currencies as confirmation to your existing trades or the planning of your future entries
- Limit your trading to few currency pairs; try not to trade more than 4 currency pairs, it makes it easier for you to focus on few pairs instead of trying to understand all currency pairs, it is really unnecessary.
- Trade currency pairs at the time when the people in that country are starting their day, learn more about forex market hours here, it makes more sense as the liquidity is more due to the day activities, trying to trade GBPUSD in Asian session or late London session will never provide you with much actions and your position might just stuck in a range, because of lack of liquidity.
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