The capital markets can be volatile giving traders a chance to make money at every turn. Prices will whipsaw based on several factors including new information, supply and demand as well as market disruptions. Geopolitical events as well as growth prospects are consistently driving market sentiment. As forex and security prices gyrate, new patterns are created which also help drive future price action. Before you risk your capital, you should become aware of the factors that affect trading.
New Information Affects Trading
It is a common conception that all the available information is currently wrapped up into the price of a currency pair or security. This means when new information becomes available, the exchange rate of a currency pair will move to adjust to the new data. Data that effects the economic landscape of one of the two countries currencies will alter the interest rate dynamic and possibly change the value of an exchange rate. Changes in monetary policy will also be a huge factor in determining the future rate of a currency pair.
Geopolitics Can Affect Trading
In addition, there several geopolitical factors that can alter an exchange rate. For example, when a government is under stress and inflation goes wild a currency can lose significant value. For example, the Turkish Lira is now feeling the stress of falling currency. The value of the Lira has tumbled relative to the Euro and the dollar. Inflation is above 10%, and interest rates have skyrocketed to protect the currency from further declines. The geopolitical events that are affecting Turkey has created a mini-currency crisis.
Positions Can Affect Trading
Sentiment is a key factor in determining the changes in a currency pair or security. The accelerating in the rate of change causes rallies and selloffs as there is a need for both buyers and sellers to allow a market to function. When positive sentiment accelerates prices move higher and when negative sentiment accelerates prices move lower. There comes a point though when positive sentiment is overdone, or negative sentiment is too bleak and then prices turn rapidly. Finding a tool that measures sentiment will help you gauge where you are in a sentiment cycle.
There are a couple of ways to monitory positions and sentiment. You can use the CFTC’s commitment of trader’s report to evaluate if hedge funds are long or short. When hedge funds are too long, sentiment is likely too high. When hedge funds (managed money) is too short, sentiment is likely too low. You can also use a technical indicator like the relative strength index (RSI) to measure market sentiment.
Summary
Markets moved based on several factors which include new information, geopolitics and sentiment. When new information becomes available a currency pair or security will move to reflect that information. This will alter market sentiment which can also affect trading when it becomes too higher or too low. Geopolitics will also be a driving factors and can sharply alter the value of a currency.
