Factors Affecting Trading in the forex market

Factors Affecting Trading in the forex market

Forex market is a global market place that has buyers and sellers from every corner of the world. Trillions of dollars on an average trading day are traded in this market. So there are many macroeconomic factors affecting the forex market. For being a successful forex trader one must keep an eye on all the global economic factors. Some of the factors affecting the forex market are listed below.

1.         The political stability of a country

Political Stability shows that things in the country are going fine and the government is working for the welfare of the people of the country. If a country is having a stable government then this a good sign for investors to invest in the currency of that country.  So if a trader is going to buy the currency of such a country then this will be profitable.

2.         Inflation rate

The inflation rate refers to the rate at which prices of products and services increase over a period of time. This leads to a fall in the purchasing value of money. If a country is having a low inflation rate compared to others then its currency is expected to appreciate and vice versa. So for a forex trader lower inflation rate is a sign to buy the currency of a country and vice versa.

To understand this concept one of the best examples is the case of Zimbabwe. As the inflation rate went on its highs, its currency devalued aggressively.

3.         Interest Rate

The interest rate is set by the country’s central bank. If the central bank wishes to increase investment and consumption in the economy of a country, it reduces the interest rates. However low-interest rates can be risky. So an increase in the interest rates is a good sign for the economy. For a forex trader, there’s a chance to buy the currency when a country has higher interest rates and vice versa.

4.         Export-import ratio

For the betterment of a county’s economy, Export should always be more than imports. This means that the demand for its currency is increasing. This concludes the value of its currency will be greater than another currency whose export-import ratio is lower. A forex trader should buy the currency of the country whose export-import ratio is higher.

5.         Speculation

We cannot measure this factor so accurately. As a beginner, it is not so easy to understand this factor. The only trick is to identify a bandwagon effect and make sure you are out of it.

6.         Employment Data

Periodically every country releases employment rates. The high unemployment rate tells us that something in the economy is not going fine. This will lead to depreciation of the currency. A forex trader if sees that the unemployment rate is high then the trader can short the currency of that country.

7.         Economic policy

Analysis of the monetary ad fiscal policy of a country can give an idea for an investor what step should be taken in trading. The bottom line is if the government has made plans for foreign capital investment. Then investors have a chance to buy the currency of that particular country.

8.         Government debt

This is one of the most important factors. A person would never lend money to a person who is already in a debt. Similarly, if a country’s debt is higher then in such a situation a forex trader should not buy the currency of that country.

9.         The stock market of that particular country

The stock market of a country can give a rough idea about the economy in the condition of a country. So if the stock market is touching highs then this signals that economy is going well and currency can appreciate . So for a forex trader if the share market is in an uptrend then the trader has a chance to buy the currency and vice versa.

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