The different times when forex, stocks, indices and commodities spring into life
In this final chapter of our three part review, we’ll break down the factors that influence the four instrument types that one can find in our platform.
Currency levels reflect those who use and trade them – the lion share of influence comes from the countries that issue them, as well as their respective central banks. So when economic data comes out, or the chairman/president of a central bank or occasionally a political leader speaks about the economy – markets move. As they reveal new information, or confirm a prediction, the currency’s crosses move in response to them.
These “forces of change” can be divided into two groups – planned and unexpected. The first come out on a regular basis and consist of numbers that reflect the economy – inflation, unemployment, payrolls and bank rates are perceived as the four most important components in this regard. (You can find them all in our calendar section and updates on their announcement appear in the platform’s newsfeed.)
The unexpected ones are a bit tricky, as the name implies. Some planned announcements can turn into something unexpected if the numbers are considerably above or below expectations, or if a press conference of a central banker gets interesting and they share their plans for action (you can check out our article on why the FOMC influences markets).
The other unexpected factors are the words of people in power, those who govern taxes, international trade, commodity supply and demand. And armies.
Although stocks are confined to the trading sessions in the respective exchanges (with the exception of the so-called pre-market and after-hour trading sessions), they are the preferred trading instruments of many traders, especially those in the U.S.
The practice of stock picking and trying to outpace indices is popular and some see it as easier to understand, as you have to understand if a company has superior products, good management and a plan for the future. In reality it’s a bit more complex than that, as we discussed here.
The circumstances that prompt individual stocks to react have a wide range. New products or services (think Apple’s unveilings or BT competing with Sky for Premier League coverage), fines, job cuts, new client announcements can all push or drag the price. It’s also important to consider that companies don’t exist in isolation, as they have competitors whose performance might indicate growth or stagnation for an industry, or even directly affect them.
The equivalent of planned announcements here is earnings season, which happens four times per year. As public companies all have to divulge their financial and accounting records, providing insight into what is going on. Coupled with an “earnings call,” where management discusses the more important points and trends, this is the time that sees the largest fluctuations.
When there is no specific news, stocks are generally traded more heavily in the beginning and end of sessions and they can also see higher volumes when traders and investors are monitoring other economic data – for instance the strong dollar is blamed by some U.S. companies for a dent in their latest earnings.
We’ll start with the simple definition of indices – they are comprised of stocks that cover certain requirements. So indices change when their components change.
A useful thing to keep in mind is the weight of companies in the most traded indices. Apple has a considerably larger influence on the NASDAQ index than, say eBay. This influence is dynamic and changes all the time (we’ll be covering this in one of our next articles.)
Turning back to part one of this series, we talked about how markets influence each other in a sequential fashion. Example: if the Chinese economy shows further signs of a slowdown, this might immediately impact the Australian indices, as their economies are connected. But even the European session and U.S. sessions can start on the downside if the numbers are bad and there is nothing else to pick them up. The opposite direction can also be seen.
Trading commodities is perhaps the most volatile of all. Gold and oil are the prime examples here. Being two of the most traded instruments in the world they have a higher volatility and are heavily influenced by negative and positive events. Gold is considered a “safe haven” for uncertain times and demand from traders usually increases when there is economic and political risk. Hence the cues for trading – lower GDP from a leading country, deflation, bad employment numbers, war and general fear.
Oil is also susceptible to these risks, but also by supply and demand. The two groups of factors act simultaneously and influence each other. Increased production is usually a sign of a healthy (world) economy, but we are living in a unique time when the traditional oil producers, like OPEC, are keeping production levels high without demand picking up (for a bit more on oil in 2015 read here).
The times when the most movement happens usually coincides with the cross between the European and U.S. sessions, but pressures do rise and subside at other times, especially when some of the aforementioned situations are unfolding.
With all this active traders, none more so than day traders, try to construct a trading schedule for themselves, making maximum use of their capital with the highest possible number of trades. Taking into consideration how many instruments you have knowledge about and how many you can trade at the same time, this is the preferred way some tackle the markets.