Forex trading strategies based on fundamental analysis are some of the most effective ones used by currency traders to profit in the markets. This is because exchange rates of a particular currency are influenced by the economic and political developments in the country in which it is issued and used, and this allows traders a way to analyze the possible directions in which they will move in order to make their trading decisions.
Here is a short overview on how to use fundamental analysis to create profitable trading strategies.
- Decide which currency pair you would like to trade. Most experts believe that you should choose a pair to trade based on the average number of pips the pair moves in a day as well as your level of experience. Thus, if you are a beginner, it is recommended that you start trading the EUR/USD pair, since it has a typical daily spread of just 1.5 pips to three pips. On the other hand, if you are a veteran you would probably trade the EUR/AUD (Australian dollar) currency pair because it offers you a higher profit potential since the typical spread is ten pips to fifteen pips although it will also expose you to higher volatility, increasing the risk of a losing trade.
- Learn how to read a forex calendar. This calendar is one of the most essential tools for creating winning forex trading strategies since it is a schedule of new and upcoming economic and political developments that could affect the currency markets, which includes data such as the expected time of release, the country from which it is coming and the expected effect on the currency (high, medium or low volatility/impact). These calendars are updated in real time, allowing you to anticipate the release and time your trading moves accordingly. You can find these online calendars on the sites of forex traders, which maintain them as a service for their clients as well as for their own use.
- Create forex trading strategies based on your analysis of which way the market will move and the expected economic developments. For example, if you know that interest rates are about to be raised in a country where one of the currencies you are trading is issued, you can use a carry strategy which allows you to profit based on the differences in interest rates between the two currencies. You sell the currency that has the lower rates and buy the one with the higher rate. This allows you to make a profit by capturing the differences between the rates. The value of the currency with the higher rates may also increase as investor capital flows into its economy.
- Know where to set your stop loss orders. These orders are essential to successful forex trading strategies since they prevent trading losses from becoming too serious by closing your position when your losses reach a certain level. Stop losses are generally placed a certain number of points away from a trader’s entry point and deciding just where to place the order is based on their risk tolerance and their trading style.