It is a general belief that forex trading is to a great extent confined to buying and selling US dollars. In fact, there is a large grain of truth in it, since transactions dealing with dollars turn out to be the most profitable ones. Trading dollars is the safest and easiest way to make money on forex. However, how to determine whether to go long or short on dollars, when it actually comes to making forex trading decisions? Making decisions about either selling or buying US dollars in forex actually depends on three contributors. Knowing what influences the dollar value helps to identify the trend direction - and this is what every forex trader is hunting for. The factors on which the dollar price depends are: supply and demand for dollars, fundamental and technical factors in addition to traders’ sentiment and market psychology. It is a good idea to analyze the forces standing behind the US dollar more closely. Supply and demand are the main driving forces that determine the value of dollars (as the value of any other currency, too, actually). It all comes to how well the US economy is performing. Strong economy attracts foreign investments, which results in high demand for dollars, and vice versa, if the economy weakens, the investors are frightened off and the demand for dollars decreases, which means that this currency loses its value. Supply and demand are also connected with export and an import, meaning that the more products are exported by the USA, the higher the demand for US dollars is, because customers buy dollars in order to pay for the goods in services in this currency, thus increasing their value. If the situation is opposite (the exports are low), dollar is devaluing. As far as fundamental and technical factors are concerned, forex traders are supposed to keep a watchful eye on whether the demand for dollars will exceed the supply for them and vice versa. Thus, they have to identify and evaluate the trends existing in the forex market. Forex traders usually watch the economic statistics and follow the political news – that allows to define if the economy is weakening or strengthening. Moreover, forex traders believe that currency price patterns are repetitive, so they use technical indicators, such as support and resistance levels and seasonal factors, to determine these patterns. Traders’ sentiment and market psychology shouldn’t be discarded, too, because the perceived expectations are sometimes more important than the actual data and existing trends. If forex traders perceive that the US economy is going to weaken, they can start selling dollars thus devaluing them even more. While if it is considered that dollar is going to strengthen against other currencies, a demand for it is created in the forex market and as a result, dollar’s value increases. Bringing it all together, combination of the above mentioned contributors standing behind the US dollar helps a forex trader to make more profitable decisions as far as trading dollars in forex is concerned, in addition to managing risks more properly.
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It is a general belief that forex trading is to a great extent confined to buying and selling US dollars. In fact, there is a large grain of truth in it, since transactions dealing with dollars turn out to be the most profitable ones.
You don’t need to know a lot about forces behind US Dollar for trading on forex marker if you are a user of Metatrader EA SIGMA! It is forex trading system, developed from traders for traders.
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