Reasons behind the price movements in trading instruments
Every trader should know about Forex price creation and the factors that propel price movement. Even before opening a position, a trader must know about these. The daily transactions in the Forex market amount to around 5 trillion dollars, making it the most liquid and largest global market. From the sky-high rate of liquidity, anyone can easily understand the overwhelmingfluctuations of the market.
So, let’s figure those prices out and learn why and how they fluctuate.
Creation of Forex Prices
The exchange rates of currencies are predetermined in the Forex market. Since this industry is an Over-the-Counter field as well as a decentralized one, newcomers often wonder who exactly sets the prices. In simple terms, the Ask and the Bid price, which are available in the industry at a given time, determine how the prices are set and also play a role in the price swings.
The Ask price is the minimum price at which someone wants to sell a pair. The Bid price is the maximum price at which someone wants to buy. The lots’ number, which is also known as the volume, also contributes to determining a price swing.
Reason for Forex Prices’ Movements
Since the whole world is within the FX market’s purview, it gets swayed by changes in lots of variables. Here are some of the major ones:
1. World Politics
Political events and news can have an incredible impact on the exchange business. It often responds to some political events to an extreme extent. If you had tracked down the time when BREXIT was in the limelight of every news channel, you might have noticed how it occasioned a decline in the GBP value.
The day the UK declared the result of the referendum, the GBP rate had fallen from 1.34 to 1.24. It perpetuated a fall to 20% of the initial amount. To learn about the impact of world politics, you should use a demo account in Hong Kong. Try it now and see how the price of an instrument is affected by major political events.
2. The GDP
The GDP refers to the Gross Domestic Product. It is the assessed net price of all produced goods, products, and services of a country for a specific period.
The GDP is one of the significant indicators of a country’s financial or economic condition. Like the political condition, a country’s economic condition also influences the Forex industry. So, you must check a country’s GDP before you trade its currency.
3. Economic Releases
As has been said before, the economic health of a country determines its currency’s value. The exchange business responds to different economic releases by organizations and governments. These releases largely echo countries’ financial conditions and allow traders to compare them against each other.
You can utilize an economic calendar to analyze different financial factors. Moreover, you can reach out to a professional to teach you about them in more detail.
4. Interest Rate
Like all other elements of the currency exchange industry, the interest rate is also volatile. You will see it changing every now and then changing the price with it. The interest rate tends to change depending on the more valuable currency in a given pair. It creates a trading opportunity if anyone perseveres with that currency.
5. Commodity Price
Any change in some special commodities has the potential to influence the price change of a pair. As has been recorded in the past, any increase in the oil price directly affects the USD and the JPY because the USA and Japan are the world’s biggest oil importers.
So, these are the most influential price changing factor in the context of the FX industry. Which factors you need to put more focus on will depend on the currency pair you will choose. Countries with a more stable economic condition are in a more favorable position than those with an unstable condition. You should be vigilant about these factors and adapt your trading strategy accordingly.