About Forex

The primary causes of changes in currency rates are economical forces as well as political and psychological factors.

Basic parameters of economy such as inflation, interest rates, unemployment, and many others affect exchange rates constantly and dramatically. Government policy has drastic influence on the rates too. Competence of the government in maintaining the currency is conducive for its rate increase. Decreasing interest rates stimulates decreased demand for the currency and, thus, depresses its value in the exchange operations. A decision of the Central Bank of a country to buy or sell the currency may strengthen or undermine its rate significantly.

Expectations of change in the economic conditions may lead to sudden and drastic fluctuation of the currency rate. This is the key concept, because the foreign exchange market is often controlled by expectation of changes, rather than the changes themselves.

Activity of professional currency exchange managers, especially when caused by the interests of powerful financial consortia, is another important market force. In many cases, the managers may act independently and use the market as a unique instrument to achieve their goals of changing major rates. Most, if not all of them, could not care less about the adequacy of charts used for technical analysis. Though, as major levels of resistance and support are approached, the behavior of the market becomes more and more "technical", and the reactions of large number of traders often become similar and predictable. Such periods in the market may lead to dramatic rate fluctuations, because significant funds happen to be invested in similar positions.