Exchange rate is one of the key concepts on Forex. Traders sell one currency, buy another and earn on the difference in rates. When a trader buys a certain currency, he or she expects the growth of the exchange rate relative to another currency.
How the rate is formed
The “supply-demand” ratio is the basis for the behavior of the price on Forex. The demand and supply form the price. When demand is higher than supply, prices rise, if supply exceeds the demand, prices fall.
If you look at the chart, you can see that prices constantly fluctuate. That depends on the volatility and the fundamental factors. To understand the price behavior, technical and fundamental analysis are used.
Factors that affect the exchange rate
Fundamental analysis takes into account statistical data, political events and macroeconomic indicators, all that can strengthen or weaken the currency. There are certain economic indicators that have a strong impact on the movement of the foreign exchange market:
- Interest rates – influences the exchange rate of the national currency and the economy of the country as a whole. This is the main tool of regulating the country’s monetary policy.
- Employment Change – measures the change in the number of people employed. The growth trend shows strength in the labor market and has a positive impact on consumer spending and, consequently, on the economic growth.
- GDP – shows the general state of the economy, an increase in the indicator strengthens the national currency, and vice versa. The GDP report includes data on exports of goods and services, consumption and investment.
- Other factors: the inflation rate, the volume of retail sales, the economic activity, etc. It should be noted that verbal interventions quite often have a significant impact on the dynamics of currency pairs.
Every day a lot of news is published, which have a significant impact on currency pairs, provoking both a sharp increase and a rapid decline in price. You can monitor the main important events on the economic calendar. News and the time of their release are displayed here. Moreover, the calendar shows the significance of the event, as well as the power of its influence on a particular currency pair.
Macroeconomic events are one of the most powerful drivers of the price movements on Forex. Nobody can forecast accurately market behavior after the release. Any important event is followed by an increase in volatility, that often foregoes the strong trends formation. It is not recommended trading 30 minutes before the release of the news and 30 minutes after. It is better to wait for a decrease in volatility and for a stable direction.
But there are traders who prefer trading on news. There are 2 approaches:
- To foresee the movement direction and the possible reaction of the market to the published news.
- To wait for the news publication and watch the reaction of the price. Thus, traders monitor price behavior, and then enter the foreign exchange market.
Technical analysis allows predicting the price movement in the future based on information of the past. You can obtain more information by reading the chart. It displays the price path, which allows tracking the significant market trends, changes in demand and supply.
There are various methods of technical analysis: chart patterns, technical indicators, support and resistance levels.
The price always moves in a certain direction (trend). The trader’s task is to reveal the direction of the trend. There are three types of trends:
- Uptrend – shows the growth of prices in a certain period of time.
- Downtrend – points to the drop in prices.
- Flat – the price does not have a clear direction. Lows and highs are on the same level.
To trade profitably, it is necessary to understand the factors that can affect the movement of the exchange rate, as well as to know how to read the price chart. These methods of analysis complement each other, that allows getting a complete market picture and foreseeing the future direction of the price movement.