There are numerous factors which one wat or another are connected to the foreign exchange markets. However, it will take a lot of time to discuss all of them. This time, we will discuss the main external influencers of the forex market.
Let’s start with the country’s economy. It is a well-known fact that the state of the economy is directly connected to the country’s currency. The economy, without a doubt, is very important because it has an overreaching influence over the financial markets, and the forex market is not an exception.
Also, it is important to keep in mind that the economy has its influencers. On a regular basis, people hear about a gross domestic product, inflation targets, benchmark interest rates, etc. Those factors shape the country’s economy.
The central banks around the world are monitoring the situation. As a result, the decisions made by the central bank will further affect the economy.
It means that GDP, as well as the inflation targets and manufacturing data, are used to determine whether this or that country is developing or not. The central bank will use stimulus programs to boost the economy.
The country’s economy is influencing the forex market. However, there are other factors, as well. Another important factor is the balance of trade. In the modern world, the economies of other countries also affect the market.
The balance between the exports and imports is crucial as when a country imports more products than it is selling abroad this is a problem. A trade deficit is a serious challenge. For example, if a country has a large trade deficit, people will start selling the currency of this country. This will be a massive blow to a country’s currency.
The political climate between the countries will also affect the forex markets.
Forex and Types of traders
There is no universal type of trader. Every trader is different as they have different skills as well as qualities. There are three main types of traders: noise traders, sentiment traders, and market timers.
The first type of trader is the noise trader. People who would like to start trading probably think that they should read a lot of reports and news daily.
However, noise traders are those traders who do not use fundamental analysis or economic data. The noise trader will make the decision based on his or her impulses.
Noise traders are important for the forex markets, as they contribute to trading volume. It means that noise traders have a huge influence on the forex markets.
The second type of trader is the sentiment trader. One of the main differences between a noise trade and a sentiment trader is that noise traders are mostly technical folks. In the case of sentiment traders, they combine the technical and fundamental approaches.
Sentiment traders are looking for trends, and after finding an interesting trend, they will follow this trend. They are using different sentiment indicators.
Last but not least is the market timer. Noise trader tries to anticipate market movements. Sentiment trader is trying either follow the general trend or going against the trend.
However, a market timer will try to predict which currency pair will go up and which pair is going to decline in the future. A market timer will use both technical indicators as well as fundamental data. It is practically impossible to predict all of the trends. However, there are traders who are quite successful when it comes to predicting currency pairs.