Prices are the first and most important thing to focus on when trading in a market, whichever it is: in FX trading market the direction in which prices move represents the boundary line between loss and profit.
Traders have to observe carefully charts and graphs displaying prices' changes: they are normally updated every 10 seconds and most of traders watch price lists with apprehension several hours a day.
There is no way to misunderstand how the market is moving: rising prices are displayed in green, falling ones in red.
A lot of factors create an FX currency-pair-quote and influence its changes.
Let's take a look at the most significant ones.
The value of a currency is determined by the economy of its country and, consequently, what influences the economic situation of a nation will have an impact on FX quotes as well: for example interest rates.
They are a good indicator of the situation of a country's economy but they must be analysed carefully: high rates, if due to an economic growth, will have a positive influence on the currency value, if due to inflation, on the contrary, they will have a negative impact on it.
The trade situation is another important factor to take into account: the more a country's goods are sold – i.e. the more foreign buyers convert their currency into the seller's one – the stronger its currency will get.
So we can easily resume, according to the Law of Supply and Demand: more demand brings about a higher value.
The same attention must be paid to capital flows.
If foreign investors buy goods of a country its currency's value strengthens.
A high inflow rate indicates therefore a high exportation and influences the market in the same way: they are two sides of the same coin.
Another aspect not to underestimate is that US Dollar is a reserve currency and this assures a demand for this currency even in bad times: other countries consider this reserve as a safety measure because goods like gold or oil are priced and traded in US Dollars.
You can collect lots of news concerning a country's economy but it will be totally useless if you don't compare them with the global market situation: the value of a currency is determined by over-the-counter and international factors.
But that's not all!
Even if you have at your disposal all the data concerning the world's economy, you may miss something important: other traders' perception of them and their subsequent reactions.
You can easily find a lot of technical analyses of the current FX market situation on the Internet or newspapers: but remember that FX is not a science and experts agree that no perfect prediction is possible.