Foreign Exchange Fundamentals: How To Evaluate Economical News And How To Forecast Their Effects On The Currency Markets
by Chris on February 15, 2010
If you wish to make profits in the currency markets then you will have to apprehend foreign exchange basics. You may have a good analytical understanding of price movements and graphs but it is also essential to appreciate the foundation on which the currency trading markets are based. If you do not, you could enter a trade at exactly the false point.
The forex market is largely influenced by national and international news and political developments. This above all relates to financial news but other major events can have an effect too. These may be expected or unexpected.
For example a catastrophe such as a major earthquake or terrorist attack is typically unexpected but could have an impact on forex rates. There is not much you can do about this except always to be sure to use stop losses.
A more predictable event would be the announcement that the Olympic Games will be held in a certain country. This could boost confidence in that country's economy and lead to a rising value of its currency. At the same time the other main contenders for the Games may suffer a fall in currency values. So it is important for a trader to know when an announcement like that is expected, and which countries are involved.
Similar situations are the economical reports that are released almost daily in many countries. Less regularly, but normally foreseeable, there will also be announcements about interest rates, inflation, gross domestic product and other issues of national economic importance.
Try to avoid trading on rumors. You might see news reports or hear other traders speculating that an announcement will move markets one way or the other. Do not trade on the basis that they are right. First because they still could be wrong, and second because if it is such a sure thing, the price has probably already changed to take into account the rumors and you will not gain much even if they are right.
Keep in mind that you are always trading on two nation's currencies, not just one. If your own land is one of them, you will have much better access to financial reports for that currency and it is easy to forget to check on events in the second country. This is particularly true for Americans because dollar news tends to dominate the forex alerts anyway. It is even more true if you are trading the dollar against a minor currency. You may have to take necessary steps to ensure that your information is not one-sided.
Even if you are just a newcomer currency trader, it is vital to bear in mind these aspects of fundamental analysis for the forex market. Exiting the market before any major announcement is usually the best move for a beginner. As you become more experienced you may develop a strategy based on this type of fundamental analysis, but it is necessary to become familiar with all of the currency trading basics first.
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