Currency Rates
For those investors interested in learning to trade forex it is important to understand those factors affecting currency rates. The forex market, also known as the foreign currency exchange, is one of the most popular and highly liquid financial markets in the world. There are multiple participants in this market including governments, large banks and large multinational companies and financial institutions. An individual investor can also trade currency online and through the use of a forex broker.
This market of course depends heavily on the foreign currency conversion rates and there are many factors that can affect this rate. There are several political factors and economic factors that affect the rates of currencies and the rates are continuously changing. The factors that affect the rates are explained below.
Inflation – inflation in a government’s economy means that the purchasing power has decreased and therefore the currency value decrease as well.
Government budget – the government’s budget can greatly determine foreign currencies values. When a country is in debt, and there is a deficit, then the rates decrease. Conversely, when a country has a budget surplus, it means that the revenue of the country exceeds its expenditures and currency rates will increase.
Trade levels – when trading currency you must understand that the trade levels of a country will determine the currency value as well. When a country has more exports than imports, this means that the country has a trade surplus and the conversion rate will increase. On the other hand, if a country has more imports than exports, than they have a trade deficit and the conversion rate will decrease, meaning the value of their currency will go down.
Economic growth – there are various ways that experts analyze whether or not a country has economic growth. Without getting into how this is done, when currency trading, you must understand that when economic growth is high for a country then the demand for that currency increases, as well as the value of that country’s currency. As you can currency rates can fluctuate based on a number of factors.
Politics – it is no surprise that the political stability of a country will greatly impact the value of its currency. The currency market is affected when there is political unrest. The credibility of a country with political unrest declines as does the value of that country’s currency.
Psychology – trading psychology plays a big part in conversion rates as well as all other markets. As more traders buy a strong foreign currency, then the demand increases, and as then the value of the currency increases as well. Conversely, when the supply for a currency is high, the demand declines as does the value of the currency.
Wednesday's trading was mostly the same as the previous trend. However, once the Federal Reserve made their announcement, a new dynamic occurred prior to the close. There was rapid buying which ran the Dow up 80 points. It was then followed by rapid selling that closed the Dow down 80 points. This was not consistent with the uptrend. Additionally, the formation of a candlestick sell signal reinforced the aspect there had been a change of investor sentiment. The Bearish Engulfing signal, with a booster tail to the upside, indicated a high probability sell signal. That became a strong indicator that the bullish force of the trend had been altered.
DOW
The T-line became an important analytical factor. The early positive trading today created the possibility the T-line was still going to act as support. That buying force disappeared relatively early in the day, confirming the bearish sentiment indicated by the Bearish Engulfing signal. That was done with selling after a Bearish Engulfing signal and a close below the T-line. How does that help an investor in hindsight? It at least allows an investor to visually anticipate more downside to the current trend. Profit taking should be taking place.
The expectation of what should occur upon the appearance of a Bearish Engulfing signal closing right on the tee line allowed for better closing executions. The early-morning bullish trading momentarily provided some hope for the Bulls. Maybe the T-line was going to hold. What should have been the greater expectation? The appearance of a Bearish Engulfing signal, with the upside booster tail, right on the tee line, with stochastics starting to curl down, should have provided the expectation that any weakness in the early bullish trading should be an alert that the Bearish Engulfing signal was the stronger indicator. Profits should have been taken as soon as weakness came into the markets this morning.
Candlestick signals provide the information that can be taken advantage of very quickly during a price trend. Using them correctly will allow for better entry and exit trade executions. Could the market continue higher? Obviously yes, but the current conditions of the indicators following the candlestick sell signal makes the probabilities for at least a short-term pullback a high probability prognosis. If that is the case, adding short positions or buying the short funds, even on a short-term basis is prudent at this point in time.
Chat session tonight at 8 p.m. ET. Is this the time to write calls against existing positions.
Good investing,
The Candlestick Forum Team
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