‘The trend is your friend’ is one of the most famous and oldest maxims in the financial markets. All experienced and successful traders agree that investors are safest when their trades are in tandem with the overall market trend. In online CFD trading, 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 give them a unique market edge and enable them to pick out the best risk/reward ratios for their trade positions. Trends allow traders to derive profits or losses from their needs, and recognizing what inspires or initiates them, may well be the difference between routine failure and consistent profitability.
Governments
They hold the most influence in the markets by having numerous monetary and fiscal tools that can change an economy’s course. Governments can hike or cut interest rates and effectively control an economy’s growth speed and 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 economic spending. 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 affect the financial markets.
International Transactions
Money flow between countries can greatly impact the economy and the markets. It is no coincidence that the recent trade war tensions between China and the US have held the need for 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.
Speculation
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 preference 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 reflects the overall supply or demand at that particular time. The cost of any purchase will rise if demand grows while supply shrinks, and it will fall if supply increases in the wake of declining demand. When trading financial help, 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 elements, it is no wonder that economic news releases remain the biggest catalyst for large price swings. 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:
Interest Rates
Major Central Banks will meet periodically to decide whether to hike, cut, or leave rates unchanged. This decision will broadly affect the entire economy and trigger huge trends in that particular country’s currency and financial markets.
GDP
The Gross Domestic Product is arguably the best measurement of an economy’s health and growth outlook. A bearish trend will be sparked when that figure falls below the market’s expectation and vice versa.
Unemployment Rate
A country’s unemployment rate is a vital indicator of the economy’s general health. This figure will also guide the actions of governments through Central Banks. For instance, the US Federal Reserve may hike rates with low unemployment to balance 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.
Final Word
Trends in markets come and go. Understanding the factors that shape trends can help traders anticipate their genesis and 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.
