When analyzing the currency market, traders use fundamental themes and technical themes to help them evaluate a currency’s solvency. Interestingly, fundamental economic and political themes may remain fairly unchanged even when price levels do not. When currency prices shift, they may continue to shift simply because a change was observed by the masses and acted upon.
Sizable price movement can take on a life of its own. Forex market traders will respond to these changes which only accelerates the process. There are some traders who ignore fundamental themes and major in solely following the trends of the market. There are also breakout traders who will jump into the market when they observe breaks on key price levels.
Technical Themes
It is important to consider technical themes when trading even if a person’s trades aren’t solely based on technical analysis.
Option interest
The currency options market is extensive. Option interest gathers around the recent range when spot prices have been trading in a relatively narrow price range. If the ranges are broken, considerable option-related interest will flood the market and trade in the direction of the price breakout. The amounts can be colossal resulting in the market’s direction moving in an extreme way.
Systematic models
Systematic models’ trading decisions are based mainly on price movements. Close to thirty-five percent of daily trade volume is from algorithmic systems.
Hedgers
Many firms set an internal hedging rate. They are satisfied if they can sell above or buy below this fixed rate. However, if the market takes a sharp turn, they may be obligated to jump into a trade as to not lose the opportunity to buy or sell at their internal hedging rate.