What affects forex trading?

Many factors affect Forex trading. Or rather, many factors affect supply and demand forces, which then affect the Foreign Exchange market. Current events (political, social, governmental, behavioral trends, etc) shift the supply and demand factors constantly, which in return cause the price of one currency in relation to another to shift as well. Since many factors influence the supply and demand for a certain currency, that currency’s value is also not influenced by a single factor, but rather by many.

The general public can become aware of economic factors through economic reports, and other economic indicators. Economic factors that influence the supply and demand include: economic policies (government fiscal policy; monetary policy), disseminated by government agencies and central banks. Also economic conditions, which include government budget deficits or surpluses influence the market. For example, the market usually reacts negatively to widening government deficits, and positively to narrowing deficits. Inflation levels and trends is also a factor—inflation decreases a demand for a particular currency. And so is Economic growth and health—the more a nation is healthy, the better its currency will perform. Indicators include: gross domestic product (GDP), employment levels, retail sales, and capacity utilization.

Political conditions also play a major part in the way the Forex market acts. Domestic as well as international political conditions have an effect on currencies. Political instability can have a negative impact on a nation's economy and its currency and it may also have a negative impact on its neighboring countries and on their currencies.

Psychology has also an affect on the Forex market. The power that traders’ perceptions have on the market is immense. If people think that a certain trend exists in which much of one currency is sold and much of another’s is purchased—it will have an impact on that currency’s price (it works both ways—an increase and a decrease in prices). Sometimes numbers—the way number sounds has an immediate impact on short-term market moves as well. Also, international events will cause people to speculate how currencies will react to these events, which in return will have an affect on the currencies.

To sum up, the Foreign Exchange market and hence Forex trading is complex—psychology, politics, government, math are only few of the many disciplines that are a part of it.