Forces That Control Market Trends

Forces That Control Market Trends

Submitted by adil on Wed, 06/04/2014 - 10:04

Here's How You Can Predict Market Trends!

Nearly all trading strategies are based upon predicting future market movements by analyzing the price trends. A trader must also understand all the forces that control the markets. Without this knowledge, a trader will not be able to devise the best trading strategy. Here is a detailed description of all such market forces:

Governments: The regulatory policies devised by government and administrative bodies play an important role in shaping the market trends. Many policies including “Fiscal” and “Monetary” policies have deep effects on trading market.

In a monetary policy, the government in collaboration with the Federal Reserve or Central Bank increases or decreases interest rates and controls the amount of foreign exchange circulating in the open market. Through a fiscal policy, the government decides when and how much to spend for addressing situations like unemployment and inflation.

Higher interest rate and large tax cuts can negatively impact a market in the long run with a declining trend. On the other hand, low interest rate and minimal taxes instill confidence in the traders and result in economic growth.

Press releases by government also create other factors that further affect the market trends.

International transactions: There is no doubt that international capital-flow directly affects the strength of a country’s economy and currency. International transactions are usually done in USD, the more foreign exchange leaves the country, the weaker its local currency becomes.

To make a currency stronger, exports should be greater than imports. This will ensure the net flow of foreign exchange is towards the country. The incoming money can be invested to develop infrastructure ensuring economic growth for a long term.

Speculation and Expectation: There is no market that does not have rumors circulating about big market moves all the time. Impending news and policy announcements by government fuel such speculative forces that set the mind-frame of the traders, who are pushed to trade in a specific direction. This market movement in itself creates a trend as investors react to this trading mindset. There are special indicators known as sentiment indicators that are used to ascertain how traders are feeling in general.

Technical analysis of past market trends also creates certain expectations about how the market will perform in the future. These expectations trigger a specific trading pattern that can shape the market trend for a long time.

Supply and demand: The abundance and scarcity of the underlying asset also control how the market is going to behave. More supply than demand indicates a drop in price is likely to occur. Similarly, an increased demand can create a price hike to the point where traders will no longer be interested in trading the asset. This will automatically create a trend shift and the prices will start to fall again.

All these factors have short and long term effects on the market trend. Generally, the change in trend starts when a government policy related to international transactions is expected to be modified. This leads to increased speculations and expectations start to affect traders. This creates a supply and demand imbalance and the market trend experiences abrupt swings.