If you are thinking about trading in foreign exchange or perhaps you simply have an interest in the forex or stock markets, you need to know how to analyse them. The currencies of the world are all entwined. What happens to one will have an effect on others, to a greater or lesser extent. Do your homework, learn to analyse and avoid being caught out.
Ordinarily, a strong stock market would mean that the currency relating to that market was doing well. People want to invest in high performing shares, this is how traders make money. However, this isn’t always the case and this is why you need to keep your nose to the ground and your ears on the news. What’s more, you need to understand what it means, the background behind it and how to interpret it and make an educated guess on the impact.
This was demonstrated quite clearly recently when the US Federal Reserve announced that, despite predictions to the contrary, they would not be scaling back their Quantitative Easing Programme. The upshot of this was effectively, a trading frenzy. Quantitative Easing (QE) is essentially cheap money as far as the trading market is concerned and the Asian markets in particular responded well to this news. However, markets were up across the board and the world share index jumped to a five year high.
You would have thought that with all this increase in trade that the price of USD would soar. However, you need to take into account the reasons behind the decision to continue with the QE programme. Concerns surrounding the growth of the economy and employment in the US have actually seen the USD drop in value against many of its counterparts.
From the point of view of a foreign exchange trader, this would be a good time to be buying USD, not so good if you needed to sell.
World Business News
Business news is also something you should keep an eye on. Sales and mergers on the stock market can also affect the value of a currency. The purchase of companies can be made in cash, in shares or a combination of these. If a transaction is large enough, say in excess of a ?1bn and it is due to be in cash and with a foreign investor, there is going to be currency exchange. Studies have shown that these transactions can cause the value of the currency pertaining to the selling company to rise by up to 1% against the value of the currency of the company purchasing. This is not insignificant when you are a trader in foreign exchange, so look out for these and opportunities that may arise.
In order to work effectively as a currency trader, you need to have a good understanding of the global economy. Concentrating on just two or three currency pairs (i.e., USD, EUR, Sterling) will not give you the view of the markets you need. A successful trader, one you makes a good living from trading in currencies will understand the global money flow and constantly have an eye on the stock market, world business news and be able to trade in any currency pair.
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