Is the Economy the Biggest Factor in Online Forex Trading?

Various factors impact online forex trading, through obvious or complex mechanisms. The state of a country’s economy is a major factor in currency strength.

Online Forex Trading and the State of the Economy

Every national currency is impacted by the state of its country’s economy. The economy however works in complex ways, and the forex market may or may not have priced in anticipated impacts. Long before the actual events occur in the economy. Apart from this complexity, there is also geopolitics and the reputation of the country. All of these factors can impact a national currency in the medium to long term. In the short term, economic reports released to the market, simply create volatility. But no safe clues can be inferred about day to day market direction. The currency pair in question may rise or fall, depending on what traders’ perceptions are at the time. Online forex trading is impacted accordingly. And so it is not easy to make straightforward predictions. Based on simplistic and naive relationships between economic events. Rising inflation for example is a bad thing for an economy. But a rising inflation is bound to bring about rising interest rates later on. Which will attract carry-trade investors. And they will want to buy that national currency as a result. The question is where is the currency coming from, and where it is likely to go. Economic events, on their own, are not very useful. It is economic events, together with prior history and government policy, that are more useful. And even so, traders have to check the currency in question and its trading history as well. So as to determine if even valid, substantiated expectations have been already priced in by the market, or not.

Online Forex Trading Defies the Naive Approach to the Markets

Actual online forex trading always defies most traders’ expectations. Because these expectations are naive in nature. And they fail to address the serious long term issues concerning a particular country. During periods where the economy performs poorly. The government wants to stimulate the economy so as to be able to collect more taxes. If interest rates are set lower, economic activity will certainly rise. But the national currency may fall or may rise. It depends on the exact demand by global trade, and on the willingness of carry-trade investors to sell the currency. These two factors act in opposite ways, offsetting each other. If either one prevails, the market will reflect the reality. Finally, there is demand specific to commodity related currencies. Such as there is for USDCAD, which is inversely correlated to the price of crude oil. Because the Canadian dollar is directly, strongly and positively correlated to the price of crude oil. If crude oil price rises, the Canadian dollar will follow suit, regardless of the set interest rates. So basically, every country requires a unique approach, in assessing and predicting its currency. Generic analysis methods simply don’t work. And those who attempt to trade forex online on naive assumptions, end up losing their money. Only the patient, well prepared traders are successful.

Central Bank Interventions

Sometimes the central bank of a country may intervene to slow down the movement of the national currency. Central bank interventions cause large market fluctuations, lasting several days. And the market may move by 500-800 pips. These moves are very difficult to predict by the use of technical analysis. As all technical signals are defied by fundamentals. Only in-depth fundamental analysis on the economy may help predict these interventions. What makes them even more confusing is the fact that the trend does not actually change. An intervention only causes a slow-down effect on the existing trend. Through the short lived counter trend move. After which the market resumes its prior trend. You can’t learn forex trading effectively, without studying central bank interventions, big and small. As they are key in understanding the big picture on the relation between the economy and traders’ perceptions.