Understanding What Influences Currency Prices

Forex prices are currency prices. Currencies are issued and controlled by governments. Currency does not have a set price or a suggested retail price or a manufactures price. You cannot break down the components of a currency to find its value and sell of parts of it.

Currency used to be on a gold standard, meaning that some coins were actually made from gold so they had a marketable known value around the world. Most currencies were backed by gold and were assigned value of gold and each country maintained gold reserves to equal the value of their currency.

As global trade markets grew the central banks needed a way to track and calculate the value of one currency against another and to allow international business to move funds from one country to the next, for example to purchase inventory or pay employees in another country.  In the latter half of the 20th century an international agreement was reached to allow currencies to go off the gold standard and to apply values to currencies and allow them to be traded on the open market.

This was the birth of the Forex market. Originally designed to allow central banks, governments and business to move currency more easily, today only 20% of the transactions are for actual use, 80% of the currency exchange is for investment purposes.

Once the countries and currencies were openly and easily traded a global exchange was open. The value of currency is based on the demand for a currency by the market, as it is no longer tied to any real asset value. Currency rates move freely.

There are all sorts of investors in the forex market, day traders, speculators, long term traders, investor’s pension funds and institutional as well as banks. Everyone is looking for profit. Each investor is hoping that the markets move in their favor, in this market, there is a loser for every winner. Each currency trade is matched with a counterpart. If you purchase 100usd there needs to be someone willing to sell you 100usd and at what value.

In order to make a successful trade you need to be able to predict market movement as well as determine entry and exit points and value. This is done by what is known as analysis, and there are two main types of analysis, these are fundamental and technical. Fundamental is based on news, information, facts, reports, and data. This information comes from many sources and the better the sources, the better your analysis. Most of the information comes from government economic data and reports and comments by acceptable sources such as the Director of the Federal Reserve, and then there are new sources, which affect the markets. If you knew the news from Libya, before it made the airwaves and internet sets, you could have bought oil before it moved up due to the shortage created a reduced production due to the war in Libya. There are government reports such as Jobs Report, Unemployment reports, Consumer Price Index and Consumer Confidence. Lately a lot of press coverage has been on GDP and debt.

Technical analysis is based on charts, graphs, historic information about price and movement. Technical analysis use charts and graph and apply formulas or rules to determine their results. These include Fibonacci Numbers, Pivot Points, MACD, Stochastic and Resistance/Support.

There are traders who only use Fundamental Analysis and there are traders who only use Technical Analysis. Good traders use both but rely heavily on one style or the other, but they know and understand each.

Leave a Reply

Your email address will not be published. Required fields are marked *