‘The trend is your friend’ is one of the most famous and oldest maxims in the financial markets. In fact, all experienced and successful traders agree that investors are at their safest when their trades are in tandem with the overall market trend. In, where leverage amplifies market moves, developing a trend-following strategy is paramount to success, or at the very least, survival.
But it is one thing trying to follow trends, and another altogether comprehending what shapes them. Understanding what influences price direction can help traders anticipate trends before they happen. This can consequently give them a unique edge in the markets and enable them to pick out the best risk/reward ratios for their trade positions. It is trends that allow traders to derive profits or losses from the markets, and recognizing what inspires or initiates them, may well be the difference between routine failure and consistent profitability.
They hold the most influence in the markets by having numerous monetary and fiscal tools that can literally change an economy’s course. Governments can hike or cut interest rates and effectively control the speed of growth of an economy and the inflation rate. This will have an immense trickle-down effect on the economy, from investors’ appetite to take risks and banks to give out loans to the amount of disposable income available among the public.
Governments can also invoke fiscal tools, such as increasing or decreasing spending in the economy. This can, as well, has an impact on employment rates in a country or even impact the stability of prices. Any government can also control the amount of investment flowing in or out of a country, which will greatly impact the financial markets.
The flow of money between countries can have a huge impact on the economy and the markets. It is no coincidence that the recent trade war tensions between China and the US have literally held the markets in ransom. If more money leaves a country than comes in, the economy will continually become weaker. But if more money comes in than leaves, an economy becomes stronger, with even more money available to stimulate the financial markets.
The integral role of speculators in financial markets has been well documented. By seeking to profit from price fluctuation, they contribute to price stability and enhance market liquidity and efficiency. Current actions will shape the expectation of future prices. Different groups of people help create sentiment bias in the markets: consumers, investors, and even politicians. By tracking various sentiment indicators, general market participants can develop a bias for future prices. Ultimately, cumulative speculation can trigger any price cycle and, eventually, a market trend.
Supply and Demand
The price of any financial asset at any given time is a reflection of the overall supply or demand at that particular time. The price of any asset will rise if demand is growing while supply shrinks, and it will fall if supply increases in the wake of declining demand. When trading any financial assets, investors must understand and determine whether the underlying demand and supply forces are shifting and in which direction.
All these factors can trigger both short and long-term trends. With multiple investors tracking the headlines of any of the factors, it is no wonder that economic news releases remain the biggest catalyst for large price swings in the market. Therefore, financial market traders need to incorporate a news trading strategy that will seek to profit from any headlines with the potential to shape both short and long-term trends.
Here are the news releases investors and traders should look out for:
Various major Central Banks will always meet periodically to decide whether to hike, cut, or leave rates unchanged. This decision will have broad implications on the entire economy and trigger huge trends in that particular country’s currency and financial markets.
The Gross Domestic Product is arguably the best measurement of an economy’s health and growth outlook. When that figure falls below the market’s expectation, a bearish trend will be sparked, and vice versa.
The unemployment rate of a country is a vital indicator of the general health of the economy. This figure will also guide the actions of governments through Central Banks. For instance, the US Federal Reserve may hike rates when there is low unemployment, with a view of balancing inflation with economic growth. The Unemployment Rate’s importance is highlighted by the fact that one of the most influential market news releases in recent years has been the US NFP (Nonfarm Payroll) report.
Trends in markets come and go. Understanding the factors that shape trends can help traders anticipate their genesis as well as their end. By tracking news headlines of the factors that shape market trends, traders can consistently pick out lucrative opportunities in the market with minimal risk exposure.