HOW THE FOREX PRICE ARE CREATED AND HOW IT WORKS ? BEGINNERS NEED TO KNOW.
Forex Price Explain, By Forex Forum
The Financial Markets department compiles indicative foreign exchange rates daily for use by the general public. These rates reflect the average buying and selling rates of the major participants in the foreign exchange market at the open of trade every day, thus providing a good indicator for any interested party on the value of the shilling on any particular day.
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.
Comparison of Monetary Policy
Exchange rates are basically a comparison between the policies of two countries. It is essential to understand that exchange rates are not absolute rather they are relative. The following factors are considered amidst many others while comparing the monetary policies of any two countries.
1. Inflation: Exchange rate is basically a ratio between the expected number of units of one currency and the expected number of units of other currency in the market. Inflation increases the number of currency units. Therefore, if one currency is facing inflation at the rate of 6% whereas the other is only facing inflation at the rate of 2%, then the ratio between the two is bound to change. Hence, inflation rates are a major factor while determining exchange rates. However, the official inflation rates often do not tell the true picture. Therefore, participants of the market use their own estimates of inflation rate and come up with their own valuations for currency pairs.
2. Interest Rates: When investors hold a certain currency, they get a yield in terms of the interest rate that is applicable on that currency. Therefore if investors were to hold a currency with a 6% yield as opposed to a 3% yield, they would end up profiting more! Therefore, the interest rate yields are also priced into the Forex rates that are quoted in the market. The currency valuations are extremely subjective to interest rate changes. A small change in this rate brings about a big reaction from the market participants.
Therefore, Central Banks become extremely important participants in the Forex market since they control the monetary policy which is one of the biggest determinants of the value of the currency.
How Forex Price Works In Forex Market?
Market participants in Forex send their bid and ask orders (with volume) at which they are ready to buy or sell a particular currency pair.
The current bid and ask prices at any given moment are determined as follows:
- The highest price in the order book that someone is willing to buy at is taken as the bid price;
- The lowest price recorded in the order book at which someone is willing to sell is taken as the ask price;
To illustrate this point let’s look at an example of the EURUSD currency pair.
Suppose that EURUSD is trading at a price of 1.1578/1.1580 (bid/ask). What this means is that the highest price someone is willing to pay to buy the Euro against the Dollar is 1.1578. Conversely, the lowest price someone is willing to accept to sell the Euro against the Dollar is 1.1580. Thus the current quoted (bid/ask) prices.
Now, the next logical question is what causes the price to move from 1.1580 to 1.1582, for example. You may have also noticed from experience that spreads vary (e.g. the 1.1578/1.1580 (bid/ask) can easily become 1.1576/1.1584 in just seconds). You can join a forex trading forum for learn more about forex price and forex market. Because, inside a forex forum, forex experts share their valuable knowledge and experience with others. It’s very helpful for beginners.
Factors that drive the currency prices
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.
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.
So how do you make your forex trading strategy a success?
Here are some tips.
Use forex technical analysis as a basis for your forex trading strategy.
Technical analysis and looking at forex charts gives you a distinct edge in that it takes into account both the fundamentals and investor psychology.
If you are trading forex NEVER do the following:
1. Trade fundamental news stories volatility is high and your playing catch up as the news is instantly discounted.
2. Never mix fundamentals and technical analysis as there separate disciplines.
3. While technical analysis is a great way to trade, be aware its an odds game and NOT a science.
Humans are unpredictable and while you can get the odds in your favour nothing is certain.
For learn more about forex market join these forex forum.
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