A Guide to the Most Important Factors in Trading

A Guide to the Most Important Factors in Trading

Forex Trading

Every day, a huge number of traders enter the Forex market with the objective of making profits. The importance of the currency market today cannot be ignored when you consider the significant spike in numbers, as well as the increased economical and globalisation trends.

In the Forex market, investors around the world trade global currencies in pairs. The market alone is significant to the global financial market and international trade. This trade covers import and export which adds to the demand for goods and services.

In this guide, we shall run through the major factors that affect Forex trading and what to consider when maximising your trades for best results. Key areas will include, the macroeconomic outlook, tech innovations, political environment, the global financial environment and more.

We shall also be looking at the importance of demo trading and why it is essential to learn to read the charts during this period. Every trader, beginner or intermediate will learn something from this guide.

The Fundamental Analysis

The fundamental analysis (FA) and technical analysis (TA) are complementary concepts in guiding a Forex trader to their potential growth amidst a largely fluctuating market. While both novices and veterans can benefit from the following, the latter have learned one major thing.

It is not strategic to spend an inordinate amount of time of the fundamental analysis part of the trade. This is mainly because they don’t have the resources, including access to important information, or the ability to study vast quantities of data released to the public every day.

Major banks, hedge fund companies and institutional investors have access to such resources. However, even they have a hard time making accurate prediction on the direction of market forces. The advice is to simply use FA to gauge the overall feel of the market positions, the interaction between important variables and the differences in the current monetary policy. These factors will help to determine the best opportunities at any given time.

It is the goal of every Forex trader to study the market conditions every day and review this strategy based on the market overview. FA and TA are the important tools you need to achieve this objective every time you trade.

Macroeconomics concept

The First Factor: The Macroeconomic Outlook

In other to build wealth, we must develop an analytical structure. To do this, we must first determine its basis. This analytical basis involves the assessment of macroeconomics at an international scale.

We must establish the context at the highest level to sieve out the data and reach of the currency pair dynamics, at the lowest levels. This involves examining the monetary policies and cyclical dynamics of major centrals banks around the world, as well as other key indicators.

It is extremely important to study the previous behaviours of financial institutions because they have a relevant impact on their future decisions. Traders should have access to historical data while studying the future direction of the markets.

  • Identify the phase of the cycle

Know the phase of the economic cycle of the market on a global scale. When you assess the accumulation of international reserve, global default rates, and bank loan reviews of top economic giants, it is easy to see the shifting phase of the global economic cycle.

  • Study technological growth, political situations and the fundamentals of emerging markets

While identifying the cycle phase, traders should also establish the dynamics that can increase outcomes and create a period of global economic expansion devoid of inflation. For example, when upcoming economies embrace new technologies of more advanced countries, and develop a new basis for industrial produce, there will be an increase in productivity that will support growth and prevent inflation.

The global political environment also has an impact on international currency rates. In the 1970s when inflation was high, it was due to many political events at the time which were taking its toll on economic markets. Perhaps, the latest example is the case of the EU referendum which confirmed the exit of Britain from the European Union. The next day, there was a significant drop in the value of the Pound Sterling; a move which affected Forex margins worldwide. The ongoing Brexit negotiations are still affecting the performance of the Sterling in currency markets.

Global market

The Second Factor: The global financial environment

The next step takes us from a general overview to a more focused topic of the economies of advanced countries. The first factor outlined the various elements that impact economic status of every county. Here, we will look more closely at the scope of the present phase of the cycle.

  • Study the interest rate policies of powerful global economies

Following their past behaviours, we should examine the policies of key central banks and their respective biases. Notable examples include the Bank of London, the Federal Reserve and the Bank of Japan. Your studies should consider the policy tendencies of these institutions, as well as their independence.

By studying these factors, a clearer view of the money supply growth is visible. It is then easier to access variables such as volatility of the stock market, the interest rate projections and the growth potentials of emerging markets. The results can ultimately be used to calculate critical rate differentials in comparison to other economies.

  • Perform a comparative view of money supply expansion and credit standards against the previous period

After understanding the policies of these major financial institutions (central banks), it is necessary to compare them with the previous behaviours and gauge their likely effect on the global economy.

It is normal to expect easy money when emerging from a recession, and if the credit channels are working, traders will be prompted to raise the risk threshold of their portfolios. Alternatively, a rigid monetary policy coming after a time of economic boom, is an indication that the global economy will experience a restructuring period, leading to a reduction in the risk threshold of their portfolios. Trade spreading is a typical way to achieve this. By spreading your trades, you minimise your risk.

If the period of loose monetary policy (low rates) continues, this would mean that the Forex market will likely experience risk bubbles. In other words, currencies of countries with poor fundamentals will rise well above their equilibrium value. This is known as a contrarian trade opportunity for shorting currencies.

Conversely, if the is a continued period of strict monetary policy (high rates), most of the advanced countries’ central banks will compel investors to decrease leverage, thus reducing the impact of the currency markets. Therefore, as currencies of countries with strong fundamentals rise well above their equilibrium value, there will be another contrarian trade opportunity for currency shorting.

Forex Trader Studying the market

The third factor; study the interest rate differentials of various countries

This factor highlights the actual currencies traders buy or sell, and how long they maintain their currencies.

Follow the statistics for unemployment rate, output gap and capital expenditure, because most of the time, markets place great priority on interest rate differentials between currencies. It is therefore necessary to form an opinion on the position of the interest rate of central banks. A good way to do this is by analysing unemployment rates and output gap.

When there is a rise in the capacity constraints of an economy, and unemployment rates drop, the shortages in the labour market causes pressures in wages which automatically lead to higher prices and inflation in the economy.

To resolve this, the central banks increase interest rates and keep it elevated until the economy starts to cool off. This is show by increasing unemployment and lesser capacity constraints.

Traders who follow these trends can easily determine the direction of interest rates and form an opinion for the position of their trades.

  • Do a comparative study of the currencies’ balance of payments

A country’s balance of payments is like a company’s balance sheets. The positive the balance of payments, the more resilient its currency will be when there is an economic blowback. Traders should study the “balance sheet” of different countries to inform them of their financial status and how healthy or risky it is to trade their currencies. Is the external position of the country maintained by asset sales and bank deposits (which are easily reversible), or by long term developments like reserve accumulation?

Forex Chart on tab

The act of trading

So far, we have discussed the important factors that affect market directions and trading positions for investors. However, it is also important for beginners to understand trading platforms and programs of different brokers because they vary.

Does a broker use a dealing-desk or a non-dealing desk platform? Study the types of software, like the MetaTrader (MT4), by demo trading. Many brokers offer this service for free. The significance of demo trading cannot be overstated as it prepares every trader (practically and psychologically) for the actual trading activity.


The fundamental analysis of Forex trading may sound like a complex venture, because it is. However, when you truly understand these important factors and how to apply them to your trade, the outcome can be highly rewarding. If you are new to trading, take some time to understand the general currency market before diving in. There are several online resources (like this one) to guide you.

Ensure you register a demo trading platform; they are free. Practice extensively during the weeks leading to your first live trade. This includes studying the line and bar charts. When you complete the exercise, you should be able to emerge a highly informed trader.