Currency traders spend a lot of time and money in predicting currency price movements, it is very true but find out in this article the exact price of forex and its currency correlations:
Currency traders spend a lot of time and money predicting currency price movements. But understanding the price relationships between currencies will ultimately determine if you earn money with forex trading. The forex market includes more than 50 currency pairs. These pairs can move in equal, opposite or random directions, and their correlations will change continuously over time. Even if your price forecasts are out of money, you can reduce your losses and even profits if you understand the correlations of currency pairs.
Market news moves quickly in the online forex market. As forex trading news and twitter sources are transmitted through your screen, how do you determine which news is what moves prices? Currency traders carry out operations according to their price direction forecasts. These forecasts are based on a combination of data and news on interest rates, inflation and macroeconomic data.
Information overload is in fact a risk for currency markets, but this data can easily become useful price analysis based on its known impact on market prices. This forex trading guide from the forex broker Trade FW was developed to help you gain a price advantage in fast-moving currency markets.
Currency brokers earn money on the difference between the offer and the sale price, but the range of prices they can offer in the market is determined by many factors. Fundamentally, currency prices are determined by the balance of supply and demand in a currency market. If demand is high for a currency, traders raise the price to compete for a lower offer. If demand is low, excess supply leads to lower prices. These dynamics of supply and demand are so unpredictable that even the best forex brokers and analysts cannot consistently predict price direction, but can understand market signals and indicators to improve the forecast of foreign currency prices and business strategies.
Many factors in the currency market influence supply and demand.
The most influential factor is the central bank. Central banks control the money supply through the adjustment of interest rates that, like a dam, control the flow of money in an economy. Economic growth is the lever. Each country has an ideal growth rate measured by gross domestic product (GDP). China’s current GDP target is 6.5 percent, while the US UU. believes that 3 percent growth is not too hot or too cold.
If economic growth exceeds this ideal rate, the central bank raises interest rates. Since it is more expensive to borrow money to finance business and buy goods and services, businesses and consumers spend less money. Over time, the economy slows. If economic growth is too slow, central banks lower interest rates. The lower cost of money allows businesses and consumers to spend more money. This monetary stimulus, in turn, stimulates economic growth
Currency Market Movers:
The most influential indicators in the market are economic data that indicate whether the economy is slowing or growing and at what rate. Traders monitor this data to forecast what central banks will do with interest rates.
A stream of economic data that affects foreign currency prices is published regularly. These data have different degrees of impact on currency prices ranging from low to high.
Some medium-high impact data to prioritize include:
Gross domestic product
Price Index – The key indicator of inflation in an economy.
Producer Price Index
Any related economic news that may imply economic health is also closely observed. The speeches of the central banks are the most influential news. Central bank governors often drop suggestions on the future direction of the interest rate and estimates on inflation forecasts. If prices rise faster than the central banks’ 2 percent inflation target, the Fed will raise interest rates to slow the economy. If prices grow to less than two percent, the Fed will lower interest rates to encourage consumers and businesses to spend.
Other important news include:
corporate earnings reports
analysts’ forecasts for economic growth
Import and export orders (trade balance)
Currency Correlation Traps
Since currencies are traded in pairs, it is important to understand the price relationships between them. The eight main currencies by trading volume are AUD / USD, EUR / USD, USD / JPY, GBP / USD, USD / CAD, EUR / JPY, EUR / GBP, and USD / CHF.
The correlation between currencies is measured between +1 and -1. A correlation of +1 means that the two currencies move in the same direction. A correlation of -1 means that they move in the opposite direction. By taking currency correlations into consideration, you can reduce high price risk and unprofitable business strategies.
Here are some correlations that you may want to avoid operating:
The high and positive price correlation – The EUR / CHF and the GBP / CHF have a high correlation of 0.92 – which is not a surprise, since the base currency economies (EUR and GBP) are closely integrated and The quote currency (CHF) is the same. If I had to take a long position in both pairs, I would have a high exposure to price risk due to the possibility of a price decrease.
No price correlation – The EUR / CHF and USD / CHF have a correlation close to zero (-0.8). The price movement is random.
Negative price correlation – GBP / USD and USD / SGD have a high negative correlation of -0.94. If you had to traverse both currency pairs, most of the earnings in one currency would be eliminated by losses in the other.
You can also reduce your exposure to price risk by trading derivatives of underlying currencies. Instead of buying a currency directly, you can buy an option on the future direction of the price of a currency pair.
An FX option provides the right, but not the obligation to buy (a call) or sell (an option) a currency pair at a specific price (the exercise price) at a future date (the due date). The same underlying factors affect the price movements of currency pairs – interest rates, inflation, and macroeconomic data. With an FX option, your exposure to price risk is limited to the premium.
Your currency trading strategy will be the most successful if you formalize your currency trading process with a currency trading plan. Forex traders lose a lot of money by operating on instinct instead of discipline. At the same time, your strategy must be flexible and change with the market. Currency correlations change and can be dramatically different in the short and long term.
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