Price trends allow traders to earn profits. What creates them and what can we learn from the factors to predict the trend? Here is the full explanation.

A market trend refers to the general direction or movement of prices in a financial market over a specific period. It represents the overall sentiment and behavior of market participants, reflecting whether prices are predominantly rising (bullish trend), falling (bearish trend), or moving sideways (sideways or range-bound trend).

But what causes the market trends? There are several factors:

  • The Government: Their fiscal and monetary policy significantly affects the financial market.

  • International Trade: The Balance of Trade affected the market.

  • Speculation and Expectation: These two are inseparable parts of the financial system.

  • Supply and Demand: Both created the pull-push dynamic on its exchange rate.

Trend

The trend is something that allows traders and investors to gain profits. Whether for the long or short term, price movements create profits and losses in one direction market or limited range. For this reason alone, you must understand the many things that form market trends.

 

Causes of Trend Fluctuation

Four main factors could cause trend fluctuation. By learning how these factors create the trend, it will give you an insight on how trends are created.

 

1. The Government

The government's fiscal and monetary policy significantly affects the financial market. Monetary policy refers to policies released by the Central Bank about the circulation of money or, by default, the financial market. Increasing and lowering the interest rate, can effectively slow down or accelerate economic growth.

Fiscal policy, at the other end, is policies related to the government's expenses. The government used fiscal policy when they tried to raise the debt ceiling, issue more sovereign bonds, raise public servants' salaries, etc. Fiscal policies usually strongly impact how much investment flows in and out of the country.

The government's policy could also take shape in the form of law. 'Soft' laws on tax, for instance, have been the reason for investors to save their money in tax havens like Cyprus and Cayman Islands. This brings money into those countries and therefore injects a much-needed investment to live up to their economic activities. It's important to check the economic calendar before trading.

 

2. International Trade

International trade is represented directly by export and import. They appear in Balance of Trade. A surplus trade balance means that a country exports more than it imports. This is good because more money enters the economy than leaves it. A trade deficit, on the other hand, means that the country imports more goods and services than it imports and has to pay more to another country. Whether it is a surplus or deficit, the balance of trade contributes directly to the country's GDP (Gross Domestic Product) and determines its wealth and prosperity in the long term.

 

3. Speculation and Expectation

Speculation and Expectation are an inseparable part of the financial system. Speculation did by market players as they try to bet on the future economy by considering the current economic indicators' performances. When many people agree with certain speculation, the trend will change.

Expectation, however, refers to hopes and outlook for the future. To measure expectations, research organizations, and government bodies usually rate these sentiments by surveying what certain groups feel about the current economic conditions and their expectation for a certain period. The Consumer Confidence Index, for example, is the result of such surveys done to a group of consumers.

On the other hand, purchasing Managers Index (PMI) results from a survey on several private sector companies. These surveys sometimes could illustrate the economic condition better than the conventional economic indicators; that's why they too, have a strong influence on forming market trends.

 

4. Supply and Demand

Supply and demand for currency created the pull-push dynamic on its exchange rate. In this sense, monetary policy plays its hand. The increase in interest rate could raise demands for a certain currency because investors wanted to take profit from the rise. Lowering interest rates, conversely, could make investors sell the currency in their hands and make the currency's exchange rate drop too.

In a period of high inflation, the demand for money increases because people need more money to buy goods and services. In deflation, however, less money is needed. If something that could influence the supply and demand of money changes, such as interest rate and inflation, there will be ups and downs in the trends.

Changes in supply and demand are more easily spotted in the commodity market. The Discovery of gold mines could easily increase the supply of gold. In contrast, war in the Middle East endangers the world's oil supply. Market players make decisions based on the commodities' recent circumstances and their projection for the future.

 

Short and Long Term Trend

It is important to note that these factors create the trend. Although they are in different fields, they connect closely with one another. A government decision on its expenses and tax, as well as the Central Bank's announcement to maintain or change interest rates, dramatically affects long-term trends.

Theoretically, a low interest and tax rate could stimulate economic consumption and growth. Contrarily, high interest and tax rates reduce consumption and push growth down. At least, that was their impact on the real economy.

In the market, newly published news usually creates relatively big volatility as traders and investors respond to the news by buying and selling currencies. The activities increased before and after the announcement, creating a short-term trend. Long-term trends will form aftermarket players to understand the news's implications fully.

Those are all you need to know about the market trends. Next, you should apply what you've known by observing the market and try to identify the current trend.