- There are Internal Factors of exchange rate
- Internal Factors are hard to explain but important
- Technical factors of exchange rate
- Index of market sentiment
- Tips for reading market sentiment
- The Economic Surprise Index
There are Internal Factors of exchange rate
Internal factors mean the factors internal to the market itself, unlike fundamentals.
Specifically, it is the status of open interest initiatives and the individual circumstances of market participants.
You may be thinking why such internal factors are important when trading in Forex and CFD markets, but it is more correlated than many traders think.
For example, weak materials may overlap and the market that has been on a downward trend may suddenly rebound even if there is no material.
Of course, there may be new buying to pick up low prices, but when the movement is rapid, it is often due to the buyback of the sell positions.
In particular, when a hedge fund that has a large amount of funds and conducts medium- to long-term transactions to a certain degree which moves into the opposite trend, the fluctuation range becomes large.
Of course, it is possible that there are fundamentals behind such behavior, but there are many times when many analysts are wondering “why is this timing?”
Internal Factors are hard to explain but important
As the volatility of the market price increases, funds, etc., hedge funds tend to reduce their open positions.
This is because the risk management method called VaR (Value at Risk) increases the risk measurement value.
They then move to settle positions, mechanically increasing the cash ratio, regardless of the market outlook.
These trends are internal factors because they are behaviors based on individual circumstances of market participants, not external factors such as news and economic indicators.
However, since the foreign exchange market is a bilateral transaction, it is difficult to grasp the trends of market participants, and internal factors are rarely taken up in market commentary.
It’s good to know that there are often internal factors involved in market movements that are difficult to explain.
Technical factors of exchange rate
We often see the terms “technical factor led to raising” and vice versa in articles explaining market conditions in foreign exchange markets.
What does this mean?
A large part of the exchange rate follows the fundamentals, but the fundamentals do not change every day.
On the day when there is no conspicuous news and no significant economic indicators are released, trading clues are lacking.
In such cases, trading based on technical analysis and trading trends of market participants who are engaged in system trading may lead the market.
They execute orders at the trading points on the technical analysis.
This situation is called the technical factor initiative.
While observing the trends in the market, we try to keep track of the trends that are likely to emerge.
Even if the factors are not clear, if you break a level that seems to be a resistance line, you buy.
These trends further accelerate market movements.
However, since many market participants are paying attention to such technical trading points, on days when economic indicators are not announced, there is already a basis for such technical trading.
Index of market sentiment
Market sentiment cannot be ignored as a factor in forming the exchange rate.
On the contrary, it’s a very important factor.
However, unlike fundamentals and technical factors, it is difficult to understand numerically and visually.
Therefore, market commentary by reporters and economists focuses on visible facts and does not make many references to market sentiment.
The way the market reacts to materials and news varies from time to time.
In fact, the market is neither calm nor objective.
Even if strong and weak materials come out at the same time, they may react more strongly to one or even ignore others at all.
This is because market sentiment is not neutral but leans towards one.
This situation is often biased, but the market is always that way.
Then, how can we make use of the elusive market sentiment in trading decisions?
First of all, it is necessary to know these because there are indicators that are useful for reading market sentiment in the foreign exchange market.
The following is a brief introduction:
- VIX index
The VIX index is an indicator of the expected volatility of the S&P 500, which is a typical US stock index but is also known as the fear index. This is because it often rises when the market is falling and is considered to be an indicator of investor anxiety.
- MOVE index
The MOVE index is a bond-type fear index, and like the VIX index, it represents the psychological anxiety of the market.
- TED spread
Ted spread is the difference between US bond yield and dollar interest rate, and is recognized as a barometer of market uncertainty. It rises when there is a credit crunch in the financial markets.
- Risk reversal
This is a term used in options trading, but it refers to the price difference between a call (right to buy) and a put (right to sell). It is considered to be an indicator of market participants’ market views and psychological state.
- Bull Bear index
Bull Bear index surveys market participants to find out the proportion of bulls (bears) and bears (bears). As a rule of thumb, it is often the ceiling/bottom that is extremely tilted to either side. However, you can use it to find out if there is a company or group that publishes a reliable index, but when you do not hear much about the exchange rate. It takes time and effort to take a questionnaire and total it, so there is a difficulty in lacking immediacy.
Tips for reading market sentiment
As mentioned above, there are some indicators that can read market sentiment numerically, but it is not market sentiment itself, and it is not very useful for short-term trading.
In order to move quickly, it is essential to be able to feel the market psychology yourself.
You will be able to do it if you have a fair market price.
It’s the same as anyone can read the atmosphere of the place when they are gathering and having a conversation.
If you observe the movement of the market and how commentary says about it without having open interest yourself, you can feel the mood of the market.
However, the important point is that you do not have an open interest yourself.
This is because if you own an open interest, you will be caught in the market sentiment.
If you still feel comfortable, it is possible to maintain a certain distance from the market psychologically.
Psychological margins come from financial resources.
If you can afford it, you can go to the side that picks up the low price instead of the side that throws the open position in total pessimism.
The Economic Surprise Index
“Surprise” might not only mean just literally “surprise” in the Forex market, but it is an important factor in the exchange rate.
For example, in the announcement of monetary policy by the central banks of each country, even if an important decision is made, it has almost no effect when the content is as expected in advance.
This is because the market price incorporates that decision in advance.
The more confident the market participants are, the greater the degree of weaving.
Conversely, if an unexpected decision is made, that is, if there is a “surprise”, the market price will move significantly.
Market prices are formed by taking into account the things that can be predicted, so if there is a surprise, a sharp revision will occur.
When an important policy or economic statistics is announced, there is a risk that the price may change suddenly due to a surprise, so you should be careful.
Employment statistics, FOMC, ISM business index, etc. are regular events that can have surprises, and you can know the schedule in advance.
Although it is difficult to grasp the number of surprises, Citigroup, Inc. in the US publishes the surprises by indexing them.
The Economic Surprise Index is an index of the discrepancy (deviation) between various economic indicators and prior forecasts.
Zero indicates indicators were as expected, and the further it deviates from zero, the more unexpected they were.
There is no upper or lower limit value, and it is generally within the range of +100 to -100, and +50 to -50 can be said to be the central belt.
For example, let’s say employment statistics have released good numbers.
It is assumed that the Economic Surprise Index against it is +100, which is a large deviation in the positive direction.
Then, the economy was better than expected by economists, so it is a positive surprise.