The biggest trait of the currency exchange market is that it is very prone to price changes which makes this segment the largest liquid market in the world. The main reason behind market fluctuations is the relationship between supply and demand. Whenever the demand of any currency pair increases its price tends to go up and when there is a constant demand for that certain currency pair, the trend tends to remain upward making it an absolute suitable position for investors to sell their stocks.
So, it is clearly understood that trends are very important when it comes to analyzing the CFD market. Let’s say that you have $100 and you wish to trade some Euro for it. At that time, the value of the EUR/USD currency was 1.23 Dollars per Euro. But later, you found out that the value of the Euro will increase in 2 hours and become 1.13 dollars per Euro. So, what would be the best time for you to exchange those Dollars to buy some Euros? If you sell your Dollars now, will you make more profit? Or if you wait for two more hours, will you make a bigger profit? It is better to sell the EURUSD pair because the price is falling sharply.
If you hadn’t gotten some news about these price fluctuation, would you have been able to make such a decision? Probably not. For this reason, traders tend to follow some price actions to know what the market value of a currency pair is and what it might be in the future.
Price action
Price actions are nothing but charts that indicate the changing values of the currency pairs. It is a great technique for traders to understand the market situation to make a trade without any utter regret. Learning about this technique is necessary if you are willing to correctly predict the price movements in this exchange market.
Usually the traders look at the Japanese candlestick pattern formation at the critical support and resistance level. The anatomy of the candle tells the traders about the potential direction of the trend. To learn the basics, we highly recommend you use a demo account. Click to read more about the high-end demo account offered by Saxo.
How does it work?
Various factors like supply and demand, the GDP, the budget, etc play roles in changing themarket value of the commodity and it ultimately guides to change the dynamics of price actions or the candlestick patterns. Since the currency market is run online, there are no centralized exchange points in this industry. This market is administered by various institutions like brokers, banks, private companies, individuals, and many others. They have a huge influence on the market and play a role in changing the market.
For example, a multinational company took the initiative to invest in Australia. For that reason, they require the Australian Dollar. So, they invested in the AUS/USD currency pair. As a result of their inv4estment, the demand for the Australian Dollar suddenly increased creating a shortage in supply, and thus, the value of that currency pair increased. So, in this way, these institutions play role in determining the market values of a currency pair.
Each of these changes is encrypted in the charts to warn them about the alteration in the market. So, they become cautious about making their trades. Following the mentioned situation, now the traders who were willing to buy this currency pair will refrain from buying as the price has increased. On the other hand, those investors who were looking for scope to sell their stocks can consider it as an amazing opportunity to execute their trade. Thus, the price action works to create a mutual balance within the market.
The price movements in the charts can be hugely affected by global events like geopolitical tension or natural disasters. These situations may lead to a major spike in the markets but they are often short-lived to be considered as a permanent price change. Now, without understanding the dynamics of the price actions, a trader might not be able to join a profitable trade. So, a trader should always try to take advantage of the price actions in their trades.
