Have you become interested in the Forex marketplace? If so, you are certainly not alone. It is estimated that as many as 15 million consumers actively monitor the currency exchange markets, and this number is likely an understatement. There are several reasons why Forex investments have gained so much popularity in recent times. Some of the most practical include:
- The Forex markets are open 24 hours a day, and seven days a week.
- It is possible to profit on both rising and falling market conditions.
- Forex traders are highly liquid in nature.
- Most positions do not require a long-term commitment.
However, there are still several variables which can determine how a currency pair moves in relation to your position. One of these involves the interest rates set by central banks, such as the United States Federal Reserve and the European Central Bank, which significantly impact forex trading. Let’s first examine some of the key differences associated with their respective decision-making processes. We can then discuss some Forex trading tips for beginners that will come in handy.
The Federal Reserve Versus the ECB at a Glance
It can be argued that the most important difference between these two governing bodies involves the impacts that their decisions can make. Considering the fact that the United States dollar is entrenched throughout many different global economic spheres, the Fed exerts a wide influence. In other words, important decisions (such as changes in base interest rates) tend to reverberate around the world. While the ECB is still a potent force, its effects often remain primarily focused throughout the European Economic Area. However, they are still quite significant when it comes to currencies paired with the euro.
Another point to mention is associated with the mandates that have been adopted by each central bank. The United States Federal Reserve is often concerned with two key metrics:
- Stabilising prices
- Increasing domestic employment
On the other hand, the European Central Bank places a greater emphasis on price stability alone (roughly equating to inflation rates hovering around 2%). So, inflation may be slightly less of a concern when analysing the decisions made by the Fed. This can have a pronounced impact on the value of the dollar in Forex exchange circles.
Politics are a final concern; and particularly important in the modern climate. The ECB will often base its decisions on collective agreements between multiple EU states. On the contrary, the Fed can be heavily influenced by a single man: the President of the United States. Considering the instability that has been brought about by the fiscal policy of the Trump administration, investors have been closely monitoring any news emerging from the Fed as a means to anticipate subsequent volatility that may impact the global Forex marketplace.
Beyond the Fundamentals: Forex Trading Tips to Employ
Although some trading strategies employed by Forex investors can translate into other asset classes (such a chart analyses, and monitoring social media feeds), there are still a number of unique approaches that could make all the difference in the world if you are wrapping your head around the finer points. These will be explained immediately below.
Headlines Can be Deceiving
Some traders have a tendency to immediately open or close a Forex position based solely on what the headlines have to say. The problem here is that news can be misleading at times (false breakouts are one example). It is much better to monitor the sentiment of the investors themselves; particularly institutional traders. Also, it will normally take some time for the forex trading markets to ‘digest’ any major announcements from central banks. Adopting a watch-and-wait approach is the best way to appreciate where the indices may be headed.
Diverging Policies
While this next suggestion is slightly advanced, it still needs to be mentioned so that beginners can better understand the role that each central bank plays. There can be times when different policies emerge (such as an interest rate cut by the Fed that the ECB chooses not to follow). In this case, the USD/EUR relationship is likely to experience a fair amount of volatility. This could be an excellent opportunity to profit from such a price disparity.
Lag Times
Another lesser-known approach that has been espoused by many traders involves the time it takes for the ECB to announce a policy change. For instance, any press conferences are normally held a full 45 minutes after a specific decision has been taken. So, the market may react in two distinct ways: one associated with rumours, and the other influenced by fact.
Surprise, or Expectation?
Similar to other assets, the condition of the Forex marketplace is ultimately determined by human actions. This is why not everything is as predictable as it may seem. However, currency markets will often price in the reactions to specific central bank decisions ahead of time. The key here is that there can still be instances when surprises emerge, and these are reflected in sudden knee-jerk movements that are difficult to predict. This is once again why it is important to adopt a circumspect approach until the fall-out begins to settle.
Litmus Test Your Trading Principles
Perhaps you have already developed a certain strategy that shows promise. In terms of interest rate differentials, you might be experimenting with carry trades. One of the best ways to iron out any “rough edges” without being forced to sacrifice capital is to open a demo trading account with a reputable online platform. This will allow you to access real-time chart data, to follow the latest price movements, and to determine if your predictions come to pass.
The Emotional Side of Forex Trading
Decisions made by central banks can cause the Forex trading markets to experience extreme levels of volatility; if only for relatively brief periods of time. Always remember to avoid making snap judgement calls based on emotional input along. Try to maintain an objective position, and to embrace pragmatism over idealism. Having said this, keep in mind that mistakes can still be made. Avoid viewing these situations as setbacks. They should instead be considered learning opportunities; as ways to further hone your efforts.
While even the most experienced currency traders fully admit that the markets can be unpredictable, there are still plenty of opportunities to create a side hustle by adopting the advice mentioned above. With time and practice, the Forex markets could come to represent a welcome source of liquidity.
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