Why Do Forex Prices Fluctuate?
One of the basic characteristics of forex is that the price of currencies is continuously moving. This makes it a volatile market. This fluctuation leads to profit or loss for a forex trader. There are some particular reasons why forex prices fluctuate and it is important to understand these causes to trade successfully. Read on to find out more about why forex prices fluctuate and how you can trade these fluctuations.
The demand for a currency against the supply is one of the key reasons for which price moves in the forex market. Key economic news, political events and other incidents also have effects in the market value.
Supply and demand
It is one of the fundamental rules of economics that when there are more buyers in the market than sellers the price goes up and when there are more sellers it comes down. This is true for the forex market as well. In the forex market there is always an existence of imbalance between demand and supply. So when there are more buyers than sellers in the market, the price moves up with the huge number of buyers prepared to pay more to out smart other buyers in a market that is in short of a particular currency. And when there are more sellers then the price falls since the buyers enjoy more options to go for and the sellers face the pressure of uncertainty due to the less number of buyers available to trade with.
But the movement of price according to demand and supply mechanism in the forex market differs from other type of markets as currency has no intrinsic value like stocks or commodities. This means that the price of currencies fluctuates greatly due to demand and supply.
News releases
Another vital cause of price fluctuation in a forex market is news releases related to political matters, or release of economic figures. This can result in significant short term market movements as traders evaluate the possible impact it may have on a currency.
For example, after the 9/11 terrorist attack, the value of US dollar fell drastically as some traders sold off the currency due to fear of possible uncertainty in US. But at the same time others took advantage of the opportunity by buying US dollars at a low rate. The US dollar recovered its value and the traders who had bought while the price was down made handsome profits.
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Tags: forex market, forex prices