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How the Forex Prices are Created and Why They Move

How the Forex prices are created

Watching the forex prices and the factors that drive them before opening a position is a mandatory task for every trader. With more than $5 trillion being bought and sold every single day, the foreign exchange market is the largest and most liquid in the world, which means that prices fluctuate in an overwhelming manner. Find out more about the major factors that move a currency to maximize your trading opportunities!

How the prices on Forex are created

Forex is the marketplace where the exchange rate of every currency is determined. Since it is a decentralized and over-the-counter (OTC) market, you might wonder who determines the prices exactly. Simply put, they are determined by the bid and the ask offers available at that time in the market. The bid and ask offers in question are the highest price recorded that someone is willing to buy (bid) and the lowest price recorded at which someone is willing to sell (offer). The price swings are also determined by the number of lots, or the volume, of the bid and ask offers present in the market at every specific price.

Factors that drive the currency prices

In theory, because the foreign exchange market encompasses the currencies from nations all over the world, there are a lot of variables that can affect the prices on the Forex market. However, only some of them can have a major impact on your trades. Make sure to check the following variables before trading a currency pair:

1. Economic releases

The value of a currency is determined by the financial health of the country. The market reacts to economic reports released by governments or organizations, because they give a clear insight on how a nation’s economy performs and helps them compare one country’s economic health against others. As a tip, economic calendars are the most useful tools when it comes to analyzing this factor. In addition, if you’re looking for more, TradeFW.com is a professional online broker that goes beyond the standards and provides you with stellar educational materials & daily analysis.

2. Political news and events

Forex prices react, sometimes in extreme ways, to political news and events. The perfect example is how Brexit caused the value of the GBP to decline ¬precipitously in the past few years. On June 23, 2016 – after the UK held the referendum, the GBP/EUR rate has dropped instantly from 1.34 to 1.241, and continued to drop until it recorded a depreciation of 20% in just two weeks.

3. The Gross Domestic Product (GDP)

The Gross Domestic Product (GDP) represents the monetary value of all the finished goods and services produced in a country, in a certain time period. In other words, the GDP measures a country’s economic activity. This is an extremely important metric that you need to check before trading any currency pair.

4. Interest rates

Arguably one of the biggest factors that influences the forex market, the interest rate changes at certain moments throughout the year can determine the outcome of your trade. That’s because typically exchange rates tend to move in favor towards the one currency that has the highest rate from the pair, creating trading opportunities if you maintain a position with that currency.

5. Commodity prices

The prices of some commodities can impact the price of certain currencies in a different way. For example, increased oil prices can damage the USD and JPY, as USA and Japan are some of the largest oil importers in the world; but they can also help those currencies and countries that produce oil themselves.

These are the top five indicators that you shouldn’t miss, but depending on the currency pair you’re trading and when you do it, some other factors can be crucial, too. Broadly, countries that have a stable economic, political and social structure tend to be favored over those that don’t. Try to stay informed and research every additional aspect that might help you apply your trading strategy efficiently.

Conclusion

Forex is a decentralized and over-the-counter market, where the prices are determined by the available bid and ask offers. While many factors cause the prices to move, five of them are crucial: the economic releases, political news & events, the interest rates changes, the GDP, and the commodity prices. A professional online broker with advanced services like TradeFW can simplify your research process!

References:

  1. MoneyTransferComparison.com, “11 Major Economic Events From History
    And How They Influenced the Currency Market…”, https://moneytransfercomparison.com/major-economical-events-which-impacted-currency-rates/

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