Every day numerous economic reports are published globally but only a handful are really worth focusing and trading on. The best online trading platforms , such as MT4 and MT5, offer calendar services, Economic journals that present all significant events from throughout the world. When employing this strategy, traders buy a currency with a high differential ratio, meaning the interest rate of the currency they buy will be higher than that of the currency they sell. Each new event or announcement causes reactions from investors and speculators, not only within this market but all over the world. Introduction to Currency Trading Forex Tutorial: Reducing interest weakened the dollar against other currencies, thereby changing the face of U.
To some extent, the same is done in the retail forex market, where forex fundamental traders evaluate currencies, and their countries, like companies and use economic announcements to gain an idea of the currency's true value.
Fundamental Speed: The What and the How
The most significant times in a given market are when interest rates are expected to change. If the interest rate has already moved in a certain direction a few times, it must be balanced back.
That is what speculators build their trades on. Many traders choose pairs by comparing the interest rates of two currencies. In solid markets with continuously growing economies, central banks will respond to high inflation by increasing the interest rate. As we have already mentioned, this constant zapping navigates between the need to retain stability and the desire to attract foreign investors.
We, as traders, can respond by trading according to the monetary policy, its targets, and purposes. Central banks can also print more banknotes in order to expand the supply of the currency. This might change its strength compared to other currencies. It would make the currency weaker because the more currency in the market the cheaper it gets. This is the reason why it is so important to follow economic releases and events throughout the year, emanating from the central banks!
It is recommended to follow the announcements she makes to the media. Remember, Fed policy has the biggest influence in the world on the Forex market. They have enormous capital. Capital flowing in and out of these corporations suit their policies and market sentiment and can be used as evidence of existing and potential trends.
Capital Flow is money movement in and out of the market. We often hear on the news that one of the major banks intends to invest in a particular economy for which it forecasts exceptional growth; this is one of the ways it has to influence the global Forex market. During the past few years, Brazil has been a developing market with a fast-growing economy. Commercial banks and corporations from all over the world, and also speculators, commercial firms, and venture capitalists have decided to invest heavily in this track, transferring a high volume of capital into Brazil.
There are several other significant economic events that have a big impact on the Forex market. Imagine that all major economic journals and news sites including CNN, CNBC, and Bloomberg report that a certain well-known, major corporation is in a real danger of bankruptcy.
You can imagine what is going to happen to its share price over the following days. You can imagine what is going to happen to its currency.
Actually, you do not have to imagine! It is happening all over the world with the economies of U. A, Spain, Italy, Greece, Portugal, and others that are in danger. The effect is similar to stocks and shares.
The more positive the NFP, the better the condition of the market. If it rises compared to the previous report , this indicates a healthy economy which will eventually lead to an interest rate increase.
A GDP report can be lower than the previous report but still remain positive. Negative GDP, especially if it shows negative numbers more than once consecutively, should turn on a big red light concerning the stability of its currency.
GDP has a big influence on decisions made by central banks regarding monetary policy. The market rate which the buyer or borrower has to pay the seller or lender. If it rises, it indicates rising inflation which in turn will eventually lead to the central bank increasing the interest rate. It is therefore considered an inflation index. The prices included in this index come from retail. When CPI is up but at a lower level than in the previous period, this indicates deflation prices are still rising, but at a lower rate than previously.
There is a positive relation between CPI and interest rate. A CPI that is rising may cause an increase in the interest rate. In this case, frequent changes indicate changes in prices later on in the chain — consumer prices. The Index includes both prices of products and prices of materials required for production. It is released every Friday at 2: It helps us understand how different major forces in the market are going to invest their capital.
It also helps us understand the general atmosphere and to predict in which direction the wind is going to blow in the future. This report is a great tool for long-term traders. COT can be presented either as a report or a graph below a currency chart.
Unlike most of the technical indicators, COT measures volumes traded. Unemployment Rate — A report on the percentage of the unemployed seeking jobs, out of total the potential labor force. This is published once a month and helps to get a general market view. A strong, healthy economy is characterized by decreasing numbers of job seekers, and by relatively low unemployment rates.
A decline in those numbers leads to a stronger currency, and eventually to a rise in interest rates. Consumer Sentiment — Issued once a month. If using this report, compare its elements to those in a Consumer Sentiment Report from another economy.
It will help you to make a decision on a good trading partner for the U. Capital Flow — The ratio of capital entering and exiting a market. The data can be either positive or negative. Increasing demand causes a stronger currency. Trade Balance — This report shows the ratio of imports to exports. If exports are higher, the ratio is positive!
Released once a month, around the 12 th of the month, it shows changes in market trends regarding consumer purchases. The FOMC includes twelve members reserve bank presidents, the chairman of the Fed, and governors , who meet eight times per year and make decisions regarding money supply, government securities, interest rates and the banking system.
FOMC meetings are secret; therefore they are the subject of market speculations and large movements of currencies, mostly USD. Since the global crisis, this report has played an important role. During the last few years, Housing Starts have been under a magnifying glass, affecting the U. Since the collapse, the American and also global real estate market have typically received pessimistic reports.
Some economies rely more on the service sector while others rely more on the manufacturing and industrial sectors. The US and UK economies are more dependent on the service sector so this economic indicator is more important in these two countries while the manufacturing sector is more important in Germany, China, Japan, France, Italy etc.
Beige Book — Published 8 times a year. In order for you traders to make important trading decisions, you must glean all the information required. Where can you find those reports? The media provides endless news sources, whether in the print press, economic TV or the Internet.
Here are some great live sources:. FX Leaders is one of the most popular sites in its field. You will be able to find live market updates , forex trading strategies as well as advice on how to choose the right forex broker to suit your trading needs. An economic calendar is an important and integral part of your trading platform.
It presents all significant economic announcements and releases as well as other fundamental events around the world on a daily basis, which have the potential to impact the market. The best online trading platforms , such as MT4 and MT5, offer calendar services, Economic journals that present all significant events from throughout the world. They provide dates, data on each event and forecasts. It is possible to trade at the same time as the events or to respond according to market forces as it is happening.
Discover how to use fundamental forex strategies in your trading below. Carry Trade Strategy — Forex Trading Strategies The Carry Trade Forex trading strategy is very different from other forex trading strategies in the way that it operates. This forex trading strategy allows us to make a profit even when the market is stable as it does not rely on the movement of prices between two currencies but rather on the difference between the interest rates of two currencies.
Major economic events can have a huge effect on the market, effectively rendering all our analysis meaningless.
The market sentiment is the style of the various traders combined, producing an overall feel for the market. But we can turn the market volatility in our favor with certain trading strategies, such as widening targets, using low leverage, portfolio diversification, minimizing risk and more.
Arbitrage — Forex Trading Strategies Arbitrage is a speculative strategy, where someone attempts to profit from price differences of the same instrument either in the same market or in different markets.
It involves buying and selling an asset at two different prices in order to profit from the difference. Technical analysis is useful to traders in that it gives them an indication of times when they can enter or exit the market.
It also helps the trader to make the most out of the existing market status. Given below are brief explanations of some of the technical analysis based trading strategies. This strategy is employed by forex traders as a long-term plan to make the trades profitable.
It is very difficult to explain each individual price change and determine a pattern as there will be many of them. Traders need to look at the bigger picture in order to see trends. The three key Fibonacci numbers that traders should always remember are 0. They should also keep in mind 0. How to Use Fibonacci Retracement Tool. These are indicators that help the trader to analyze charts and can be used by itself or as a helping tool in other strategies.
Traders can make successful traders just by watching the price changes that are very obvious to them and drawing their horizontal levels. However, a better understanding of the horizontal levels in more complex charts helps them to spot trends that they would have otherwise missed. Divergence is a tool that helps the traders to learn the price behavior of the currency. This analysis generates patterns that will help to predict the direction of movement of the currency rates.
Divergence, a leading indicator, helps traders to significantly increase their profits. This is because the likelihood of trading in the right direction and at the right time increases if this indicator is used along with others such as Moving Averages, Stochastics, RSI, Support and Resistance levels, etc.
This method is mostly put to use by the retail investors. This tool works well in both volatile and the not-so-volatile market conditions. However, candlesticks work optimally when used with other tools. They do not reveal past price action details. Currency pair prices generally do not follow a straight-line path when moving up or down.
They usually consolidate before breaking out into the next surge or dip when moving up or down. A wedge or triangle is formed during these consolidation periods. This effect is very visible when a chart is viewed using smaller time-frame boundaries. To really master the candlestick charts, traders have to learn about some of the common patterns. The Head is the higher peak and Shoulders are the two lower ones. This patterns becomes relevant when the support neckline is broken.
In Forex trading, hedging is a commonly used strategy to limit risk. Hedging helps to reduce the risk of loss during uncertain times. He analyzed the stock price data for around 70 years and found out that human psychology emotions, fear and greed drove the market and that it moved iteratively. This is to say that the market switches between optimistic and pessimistic modes. In this strategy, the motive phase unfurls in 5 steps.
Some popular forex trading strategies are explained briefly in the paragraphs below. As suggested by the name, this method involves tracking the price of a currency pair over many time frames.
This action helps to fix high and low points which subsequently help to work out a price trend that the currency rates are following. The changes and patterns are not discernible if viewed over a single time frame.
Trading the News – Forex Trading Strategies
Our professional analysts explain the different fundamental forex trading strategies based on fundamental analysis. Understand the connection between the real economy and the currencies. Strategies include carry trade, trading the news, market sentiment, arbitrage, fair value and many more. Taking a Fundamental Approach to Forex Trading As a Forex trader you can take a fundamental approach to investing in much the same way a stock trader does. Just as a fundamental stock trader looks for relative value among the universe of stocks, you can do the same thing among the various currencies because currencies are affected by economic events just as stocks are. Chapter 5 – Fundamental Forex Trading Strategies Sometimes a fundamental approach is even more important than a technical one. From George Soros to Warren Buffet, some of the world’s most famous traders have admitted that they owe their fortunes to the .