Forex Prices - Factors That Determine Price Movement

By: Kelly Price

If you want to be successful at forex trading then you need to know how and why prices move - many traders think this is obvious but its not and that's why 95% of traders lose. Here we will look at the factors that move currency markets and how you can profit.

First let's start with a simple equation:

Supply and Demand Fundamentals + Investor Perception = Price

While the above equation is simple enough, it's deceptive and most traders fail to understand its significance, when they learn forex trading.

Fundamentals

These are the supply and demand facts and they help move price but the person studying these facts has a problem - while the facts are there for all to see, we all see them differently and draw our own conclusions about what they mean.

Our actions combined with millions of other traders, creates the price.

The facts are there for all traders to see but we all draw different conclusions that's why the facts alone are not enough to help you trade.

It's a fact that markets collapse when they are most bullish and rally when they are at their most bearish - this is investor psychology at work.

Investor Perception

Of the facts creates the price and we are not creatures of logic, we are creatures of emotion and these are reflected in the price.

It's a fact that greed and fear dominate investors and these emotions cause price spikes away from fair value. These price spikes never last long and are easy to see on any forex chart and they never last long and return to fair value.

So what do you need to understand in terms of the above, in terms of your forex education? Here are the salient points:

-Never predict price movement as humans behaviour cannot be predicted
-Trading fundamentals by themselves is hard as its only half the equation
-Trading is a game of odds and you need to get the odds in your favour to win

Now you know the above how do you get a forex trading strategy for currency trading success?

The simplest way is to base your forex trading strategy on forex technical analysis.

Not only does it take into account the fundamentals it also takes into account how investors perceive them.

Technical analysis simply assumes that all fundamentals will be quickly be reflected in price action and in today's world of instant communications and online trading, this is truer than ever before.

Technical analysis more importantly, takes into account how investors perceive the fundamentals. While prices do not move to a scientific theory, human nature is constant and this is reflected in repetitive price patterns on any forex chart.

While charting is not a science, certain formations that present themselves do offer trades where you can put the odds in your favour, with a robust currency trading system.

You won't win every trade - but if you trade the odds, you will win more than you lose and pile up huge long term profits.

Most novice traders when they try and learn currency exchange don't understand the way prices really move and think they can predict, trade news stories and use scientific theories and they lose. To win at forex trading the best way to trade is to trade the reality of forex prices changes - without predicting, focus on the odds and assume any trade can go wrong.

The equation for forex price movement is essentially simple but deceptive.

Now you know how and why forex prices really move, you can build a forex trading system to help you enjoy currency trading success.

Foreign Exchange
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