When it comes to figuring out whether currencies are going to strengthen or weaken, there are two styles of analysis that you will want to pay attention to. The first of these is what’s known as “fundamental trading analysis”, which is based on such things as economic reports and news.
Starting Point A fundamental analysis is the best place to start, especially as you dip your toes in the trading waters. Before you do, though, you might want to consider how much you already know about the countries of the world and how they are governed. This is especially important in the countries whose currencies you plan to trade.
So, before you begin your daily analysis, make sure you create a clear mental picture of the countries you’ll be trading on. How is their government structured and what are its cash reserves and deficits like? Create this as a starting point and then move on to your daily look at how things are changing.
Economic Reports As a trader, you will want to stay updated on the economic reports coming out of not only the countries whose currencies you are directly trading but also from the countries who are involved in trade with those countries. As we mentioned earlier, for example, the situation in the United States can have a big impact on the price of oil coming out of Canada, so it’s going to affect the latter’s economy.
You can take stock of a country’s economy by looking at its inflation rate, employment rate, and economic growth rate. In the case of employment, as a general rule, the economy is improving if there are fewer people out of a job.
Be aware that there can also be seasonal impacts on this rate; for example, many businesses hire extra help for the holidays or for harvesting times. Conversely, you may see an uptick in layoffs when those events come to an end, which can skew the numbers. It’s also important to be aware that the raw numbers aren’t the only thing impacting the market: there is also the expectation of what those reports are going to show and the reaction of traders depending on whether it’s as good or bad as expected.
If, for example, Canada was expected to release incredibly low unemployment numbers and the report reflects low unemployment not quite at the level expected, it can actually weaken the currency. If it showed even lower numbers than expected, this might cause worries about interest rate upticks, which will affect stocks and also impact the currency.
Inflation has a marked effect because it can indicate what’s happening to the country’s economy – but it can also be affected by growth rate. If the economy is growing, it often means there is a demand for currency, which means the currency is valued more but can also mean that inflation is rising and weakening that currency. These factors are linked so strongly that it’s impossible to consider them separately.
Along with these reports, you should also pay attention to other aspects of the country’s economy, such as interest rates. Short-term rates tend to increase when the economy is strengthening and inflation is deemed likely to increase, while long-term rates are affected by investment in government bonds. It’s for this reason that currencies like the U.S. dollar are considered to be safe havens: their bond markets continue to do well even when less stable countries are suffering.
Supply and demand meanwhile play an important role: when it comes to international trade, prices change constantly based on how much of that commodity is available and how much is needed. The more people who want a good that’s in limited supply, the higher the price will rise. Movements in funds between currencies will reflect this fact and will also affect the demand for those currencies.
Finally, it’s important to be aware that most of the reports that have an influence on the Forex market are released at very specific times; the first Thursday of the month at 1 p.m. in your time zone, for instance. As you become more familiar with analysis, you’ll start to learn when these dates and times occur and you’ll come to expect them. This is incredibly important because the release of a report can have an instant impact on the market, so it should also be borne in mind when you initiate a trade.
For example, if you decide to initiate a trade on a Thursday evening but there’s a report scheduled for 8 a.m. the next morning, the third Fri-day of the week, you might find that the report itself pushes the pips in the opposite direction to which you were expecting, scuppering your strategy in the process.
A quick search on the internet will show you that there are a number of free calendars available, some of which can be personalized to your needs such that you’re only seeing the releases that will directly affect your trades and you’re seeing them in local time. You can use these to your advantage by simply taking a quick look before initiating a trade to check whether there are any releases scheduled that may change what happens to the currency you’re about to trade in.
You can also use them to remind yourself when those reports are looming – you can be among the first to check them when they release and can make trading decisions accordingly. For instance, you might find yourself closing trades, tightening stops or delaying a decision to initiate a trade.
News and Media On a daily basis, you’ll find news stories that have an impact on your Forex trading decisions. It’s easy enough to root out stories that talk about government finances, the economy and large deals made by giant corporations, but you’ll want to develop a filter as you sort through all that information.
Don’t forget that “experts” can often be biased and stories may also reflect the hopes of the individual telling them or the government they represent. Thus the news can be remarkably helpful in developing your understanding of the world economic stage, but it’s also important to remain skeptical of what’s being said and find yourself as many sources as you are able to comfortably absorb in a day in order to verify, double check and ensure you’re getting a clear picture.
International Events While not technically a “source”, it’s worth mentioning international events in this chapter because of the immense influence they can have on your trading success.
Take a quick look at the headlines in the world’s newspapers today and you’ll see that huge event happen all the time. As a general rule, anything that causes fear and uncertainty is going to have a significant impact on the Forex market – and on your own individual trades, too. You can’t see most of them coming, but you can prepare.
These massive events can include natural disasters such as earthquakes and hurricanes; conflict from wars or terrorism events; and human-created disasters such as the meltdown of a nuclear reactor.
It’s not uncommon for a country to shut down its markets when massive events happen for the simple reason that panic can often lead to a crash. It’s a way to ensure that cooler heads prevail before disaster strikes the financial markets.
When the market is shut, there’s nothing you can do about your trades – they are frozen for the duration and your orders will not be fulfilled. The best way to avoid this from having a severe effect on your capital is to make sure you always leave stop-loss orders to automatically protect your position even when you can’t do so yourself.