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Global financial market of foreign currencies (Foreign Exchange Market, Forex or FX) enables simple purchase and sale of foreign currencies. It represents one of the largest and strongest financial markets that involve banks, central banks, financial institutions, governments, corporations, insurance companies but also individual investors.
Foreign currencies market is difficult to compare with any other sector of world financial markets, primarily because it is highly sensible to numerous factors.
Prices on Forex constantly change. Change of currencies course on Forex are usually affected by the actual currency change, i.e. course is formed in relation to demand and offer. Currency value is also very sensitive to news from economy, politics as well as news about natural disasters. Because this market isn’t centralized, it isn’t directly affected by central banks.
On Forex market traders trade with currency pairs, i.e. perform conversion of one currency to other on different prices. On such market, price of one currency pair can change its value several times within just few minutes. In periods of intensive trading, within a minute, price can change several dozen or even hundred times. Change of price in majority of currency pairs is followed on fourth decimal (0.0001), and on currency pairs that include Japanese Yen, price is followed on second decimal (0.01).
Forming Currency Pair Prices
Currency pairs value is established depending on the “expectation” when will certain change in monetary flow happen, such as: GDP increase, inflation, interest rates, budgets, trading surplus or deficit, as well as other macro-economic conditions. Demand and offer for certain currency change is affected by several factors:
Economic Factors
Economic factors can be followed in economic policy, national structure, central banks and other parameters that are presented in economic reports. Market usually negatively responds to increase of budget deficit and positively responds to its decrease.
Political Factors
national, regional and international political situation and events have lots of affect on currency market. Political instability can negatively affect national economy and subsequently national currency. Events in neighboring countries or region can have positive or negative effect on other country’s currency.
Market Psychology
Market investors’ perception can affect price movement. Economic reports and estimates affect currency price fluctuations. Parameters such as GDP, deficit and inflation are available data; investors analyze available data about previous price changes in order to identify patterns that can be useful for further price movement estimate. Expectation of future events also affects price change.
As you can see, Forex market is driven by different forces. It is important to pick the right broker that will secure your trades at the time of big economic movements. We recommend you to go through the list of negative balance protection brokers and pick the right one for yourself.