What Really Moves Currency Prices


What you will learn:

- Forex pairs are influenced by a combination of factors.

- There are very few core factors that change exchange rates

If you are interested in higher yields and can tolerate high risk there are bonds and small cap stocks that fit that description neatly. If you are interested in technology companies or environmentally “green” companies there are convenient ways to find equities or private investments that fit those categories. Putting forex pairs into categories in a like manner is much more difficult.

Currencies reflect the performance and policies of entire economies, sovereign governments and industry. The blend of factors that can affect a currency change everyday. Because of this unusual situation and the fact that there are relatively few currency pairs available to trade, two myths have arisen.

Myth #1 – Trading currency is easier because few pairs means it’s easier to find trades.

I hear this one at seminars/sales pitches all the time. It is not true. The financial markets have a remarkable equilibrium. If it is easy and/or safe, returns are low. If it is difficult and/or hard, returns are higher. Any experienced trader will tell you that having fewer choices presents some unique hardships. For example, it is more difficult to diversify, many of the available pairs are correlated and there isn’t much variation in risk levels.

Myth #2 – Currencies fall into discrete categories and can be used as replacements for other asset classes.

Traders are trapped by this myth when they begin evaluating a currency as though only one or two factors can affect its value. For example, some traders may assume that the only factor influencing the CAD is oil price...

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