There are two types of trading thoughts in Forex. Trading on statistical data and trading on fundamentals, which include economic reports. Economic announcements tend to drive the fundamental outlook of currency pairs. Most savvy traders will have a calendar that ear marks the dates when economic reports are going to come out in countries that they trade pairs for. There are also about eight countries that have a huge impact on the Forex market as a whole. These eight countries with their reports can actually modify the smaller currency pairs or the currency pairs that are not traded as often. This is not to say that all economic announcements being made are equally important. There are some reports that will have a bigger impact than others. If you know what they are, when they are in the news, you can then trade on the information.
Market Sentiment
Fundamentals are all about market sentiment. Reports offer good or bad information such as the GDP, which talks about economic growth. A poor GDP report such as a de-strengthening to the economy can have a negative impact on a currency's strength. A good report can increase the strength of a currency. It is how the market investors like you and the big corporations view the reports. Market sentiment shows up in the changes that occur to the market once the report has been released. You may see one currency going down as everyone buys into something else for a few hours. Even before the reports there can be talk about the information that will be released and whether it will be good or bad for the currency. Investors also trade on this by going with the current sentiment. Once the report starts they may sell or hold through the report gaining even more.
For Forex traders this means you can trade on information right along with everyone else as long as you pay attention to when the reports are going to be released, what experts are saying in the days leading up to the reports and watching the Forex rates change or run sideways.
The reason other traders go with statistical data is due to emotions in fundamentals. There is the thought that fundamental trading is more of an emotion game with a follow the leader mentality versus true data.
The Key Economic Reports
These reports are the main focus of the currency trades:
- Interest Rates
- Employment
- Housing
- Manufacturing
- Economic Growth or GDP
- Foreign Investment
- Trade Balance
- Consumer Confidence
- Business Confidence
- Retail Sales
It is not enough to know the reports are coming out. You also have to know what they are saying in terms of five things:
- Investment Flows
- Trade Flows
- Money Supply
- Investor Fear
- Government Interventions
These five concepts are drivers for currency market changes. They are also the points that you will analyze when it comes to the reports.
An Example
Taking a look at interest rates will help solidify this concept. Interest rate announcements are to discuss the short term target rate a central bank wants to maintain for the future. It is one of the biggest announcements in terms of how it affects the Forex market. Currency is the banking system so a change in interest rate can send a rippling wave through the economy that spreads into global adjustments.
For traders watching for the Central Bank Interest Rate announcement for the country they are trading currency on is important.
Taking a look at the impact on trade flows first consider rising interest rates which then increase investment flows leading to a demand in currency thus a value of currency occurs which leads to less competitive exports and a decrease in trade flows.
If you look at the opposite with falling interest rates then you see decreased investment flows leading to a lower demand for currency thus a lower value for the currency but an increase to competitive exports, which increases the trade flows.
This tells you exactly how you would trade in the situation. If the interest rate is increasing then the currency is in demand so the value increases for that country. On the other hand if the interest rate decreases the demand goes down so the value decreases.
#Avastocks300x250#If you are trading to make a profit on the upswing of interest rates, you would take an investment position when the rates are down, but likely to increase in the next month or several months. There are always reports on projected changes of rates before the rate is actually changed. For example in the later part of 2013 with quantitative easing being slowed by the US the expectation of interest rate increases was there. Now it didn't happen right away, but for those who invested in the US about early 2014 and with current interest rate increases they could have made a bit on the USD as it increased.
Short Term versus Long Term Trades
Many assume that in Forex markets you want short term trades. To a degree this is accurate if you want to make a quick profit on economic reports. An economic report can quickly flip a position you are currently in. However, on the long term you may find that a currency remains in its slow decrease or increase position until a major global change. At this major market change you can suddenly own a currency pair that has made you more profit than on the short term.
It is about the risk you want to take and how active you want to be in the market. There are also specific limitations to the amount of time brokers will hold certain positions such as option trading. Option trading is for the short term often based on economic reports where you buy an option to cover market sentiment on the report, but back the position with an option you do not have to go through with should the opposite of what you believe will happen, happens.