More than $5trn is traded on the forex market every single day and its inherent volatility and liquidity mean that prices are always changing for the most popular currency pairs such as GBP/USD and more exotic match-ups.
Being aware of the factors that can cause a sudden price change in forex and using data and tools to predict when a currency could be about to exhibit a ‘reversal’ is key to success. This skill will enable you to enter and exit the market at the right moment and improve your overall decision-making, which will minimize losses and maximize profits.
To trade forex, you will first need to work with a reputable broker that will give you access to the feature-rich platforms that are required for the buying and selling of currency pairs. Reading up-to-date and relevant eToro reviews 2021 from a financial consultant will give you the latest insights about this broker’s spreads, and detailed information about account types, deposit methods, customer support and payments.
Why do prices change suddenly?
Supply and demand are the two primary ‘levers’ that dictate trading in forex, and the primary factor that influences both of those is market sentiment. There are a number of different things that influence sentiment, including new economic news and analyst recommendations. Traders are always reacting to the impact that they perceive these factors will have on forex.
The main factors that cause price changes are centered on a government’s overall efficiency, especially in terms of borrowing, interest rates, inflation and general monetary policy. Any uncertainty caused by what the Federal Reserve has enacted can lead to a drop in the value of the US dollar (USD), for example.
Other things to consider include changes in political leadership, new jobs and employment reports, economic growth, and imports and exports. You can keep track of the big events during the year using an economic calendar. Referring to this might explain why certain currencies are changing suddenly during trading.
Also, because forex markets are open 24 hours a day and there are a myriad of factors influencing trading patterns, they are particularly volatile with price changes occurring second by second, minute by minute. Traders attempt to predict these movements to generate profits, as without any fluctuations, it would be impossible for either short-term or long-term investors to make money.
Another important factor in forex is liquidity. Major currency pairs are usually more liquid as they account for a larger amount of trades. Higher liquidity creates a more stable environment where prices do not lurch from highs to lows very quickly. The opposite is true with lower liquidity, which is more conducive to dramatic price changes.
As noted already, currencies are influenced by a multitude of economic, political and social factors, and traders should conduct fundamental and technical analysis to account for these and predict how the forex market will change accordingly. This will identify trends that can be acted upon to profit from uptrends and downtrends in currency prices.
How to predict a drop in value
Trend ‘retracements’ are very common in forex. This is where currency prices change temporarily but the existing trend remains the same. Being able to spot when a retracement becomes a ‘reversal’ is critical. A reversal is when the overall trend changes entirely, which can lead to a currency dropping in value.
Fundamental analysis is better for predicting longer-term trends, but for shorter price movements, you will also need to conduct technical analysis. This analysis uses price charts and tools such as moving averages and the moving average convergence divergence (MACD) to identify important trends. You can then also test the strength of these trends using indicators such as the relative strength index (RSI) and Bollinger Bands.
Trends are arguably the most important aspect of forecasting movements, and many traders focus their efforts on using trend reversal indicators so that they are ready to make the right moves in the market. These indicators will help you to identify a break in a pattern. Because forex moves in waves, when a price drops, the downtrend is a sequence of lower lows (LLs) and lower highs (LHs).
You can use moving averages, candlesticks, chart patterns and other tools to identify when the current prevailing trend could be about to end. This is why it is important to get to grips with technical analysis when you first start trading, as this information will allow you to spring into action when a trend reversal event occurs.
To conclude, there is a variety of factors that can cause sudden price changes in forex, with economic news and traders adopting a ‘herd mentality’ by following others chief among them. To predict these movements, traders need to identify a trend, use a chart pattern or indicator to determine when this trend might end, confirm that the trend has finished using specific criteria, and then take action to profit.