One of the surest strategies for success in trading on the the foreign exchange market is to identify trends early. Trends can take place over a short time frame or stretch out and become a long-term phenomenon. That is a simple concept to comprehend but how does a forex trader identify trends? You need to understand the forces that make currency prices move up or down on the international exchange.
The first place to begin is with governments themselves. In the early 1900s the United States was a prosperous nation but its banking system was subject to panics on a regular basis. There had not been a national bank since Andrew Jackson dismantled the Second National Bank in the 1830s. After another financial crisis reverberated through the economy in 1907 it was only the efforts of a private banker, J.P. Morgan, that kept America’s financial system afloat.
Guest post by FXTM
The result was the establishment of the Federal Reserve System in 1913. The new organization was tasked with managing the nation’s money supply through fiscal policies designed to stabilize prices, maximize employment and moderate long-term interest rates. For good or ill, the Federal Reserve System has been orchestrating fiscal policy for 100 years and all major currencies around the world have also set up central banks.
To accomplish these goals governments are continually tweaking their monetary policies. Since their objectives remain essentially the same it is possible for astute analysts to discern long-term currency trends. A government uses its fiscal tools to keep an economy from overheating in good times and slowing down in bad times. When experienced forex traders see a nation’s economy trending one way or the other they can make assumptions about how the currency will be manipulated in the short run.
One thing that traders focus on to determine the value of a country’s currency are imports and exports. A nation may intentionally keep its currency weak to boost exports and this tendency will manifest itself as a long-term trend to be exploited. These manipulations are hardly a secret – they are often greeted with splashy news announcements. In advance of the official moves investors often stake out their positions. Forex traders make bets on which way the wind is blowing based on what politicians are saying, where investors are likely to put their money.
Another economic force that can translate into forex market trends is supply and demand. One of the biggest hammers a national government has in its fiscal toolbox is the ability to print money. The Federal Reserve can juice an economy by pumping more dollars into circulation and this sudden burst of supply will send currency prices down eventually – if it goes beyond existing demand. Or the money supply can be tightened with the opposite effect.
A forex trader must stay abreast of these changes and other economic indicators to profitably identify currency trends. That means not only understanding the numbers but comprehending the global forces that make the numbers move.
Further reading: The importance of pacing