The word forex is an amalgamation of two words. The first word “foreign” refers to the scope and environment of the trade. It shows us the global nature of both the transactions as well as the currencies involved in this operation.
The second word “exchange” refers to the nature of the trade. It communicates to potential investors the acceptable methodology of commerce as far as their experience in this business is concerned.
This means that any factor that is able to affect either or both the domain and modus operandi of forex trading influences its outcomes in as far as profits and losses are concerned.
This article examines these factors as well as the control they each have in the forex trading arena. Studying this article should enable one to be better informed about the type of currencies they ought to invest in per time. It should also be able to communicate the red and green flags to look for before engaging in forex trading.
The Degree of Inflation
Inflation is a comprehensive upsurge of market prices in an economy which leads to a decrease in the buying power of money therein. This therefore means that the value of a country’s currency relative to another’s is partially determined by its level of inflation.
A high inflation rate is usually synonymous with a depreciation in the value of a country’s currency. Appreciation in the market worth of a country’s currency is also associated with lower levels of inflation.
It is however important to note that a country can actually experience a depreciation in the value of its currency while simultaneously encountering lower levels of inflation. This is because it takes a combination of factors and not a singular element to determine the merit of a country’s currency in the forex market.
The Flow of Information
Continuous and prompt flow of information is extremely crucial in forex trading. This is because transactions in the forex market are not only controlled by currency value but also by prevailing investor knowledge. Up to date intelligence is very vital for stakeholders because it is often the difference between huge profits and devastating losses.
Fraudsters have often taken advantage of the importance of information in this market by spreading rumors and myths that cause investors to either buy or sell certain currencies.
Capital markets are often involved in forex trading between different countries through long term investments and securities. They often prioritize the timely release of information to potential and current investors in the public domain. This may facilitate either disposal or purchase of securities. This may result in a rise or fall in price that may inadvertently affect the currency value of the country or countries involved.
The Global Market
It is impossible to downplay the role of international trade in the forex market. This is because a country’s balance of payments is heavily influenced by its balance of trade. This means that the difference between the inflow and outflow of cash in a country’s current account is extremely dependent on the difference in value between its imports and exports.
A favorable balance of trade where exports outweigh imports in worth is usually a major indication of the level of demand a country’s commodities command in the international market. A nation with products that have high global demand is bound to experience an escalation in the value of its currency. This is because a need to convert international currencies into the specific currency of the country in question will arise so as to enable traders to purchase its materials.
The Socio-Political Environment
A level of certainty is an essential element of trade that influences investors in any market. Stability in fiscal and monetary policies in a country attracts investors because of the assurance it gives them concerning the security of their interests.
Economic policies are however affected by political processes and seasons. It is legislations that influence areas such as government spending in each sector which directly affect investors. Elections and referendums may also affect the value of a country’s currency either positively or negatively depending on the level of optimism they emanate to investors.
Forex trading is affected by both microeconomic and macroeconomic factors. This therefore means that success in this field as a trader requires aptness in knowledge of the prevailing trends on a consistent and continuous basis.