One of the most important principles of forex trading basics that you need to learn is the use of fundamental analysis in trading. Fundamental analysis is a method of predicting the movements of currencies using external economic developments. The theory behind this type of analysis is that currency movements do not take place in a vacuum, but are affected by economic and political events. Forex traders who use this type of analysis keep a close eye on the latest announcements related to the economy and use this information to determine their trading decisions.
Forex Trading Basics – Using the Forex Economic Calendar
An economic calendar is one of the most essential tools a currency trader can use. This calendar lists upcoming economic events as well as predictions about how they would affect the currency markets and what particular currencies would be most affected. One example of a listing in the economic calendar is the announcement by the Executive Board of the European Central Bank regarding interest rate policies. If they decide to ease monetary policy and increase interest rates, this would strengthen the euro while lower rates would be bearish for the euro. Economic calendars can easily be found online in financial portal sites that offer information and data on the financial markets.
Forex Trading Basics – Important Economic Developments
Here are some of the most important economic announcements that you should monitor in the economic calendar.
- Gross Domestic Product (GDP) – this is a measure of production and growth of the national economy and is generally considered an indicator of how healthy it is. A better than anticipated GDP indicates that the underlying currency will appreciate against other currencies. For example, if you are trading the USD/GBP currency pair and it is announced that the US GDP is lower than expected, the dollar against other currencies, traders will sell off the dollar.
- Balance of Trade – this is a measure of the difference between exports and imports. If the balance of trade is positive, meaning exports are greater than imports, the currency is expected to strengthen against other currencies, while if it is negative, then the underlying currency will weaken.
- Employment/Unemployment Rates – high unemployment figures are seen as an indicator of a weak economy which could lead to lower interest rates as the central bank attempts to stimulate economic activity.
Forex Trading Basics – Tips on Using Fundamental Analysis
If you are planning to use fundamental analysis to trade in the currency markets, you have to constantly watch upcoming economic developments and be prepared to take advantage of the news as soon as it breaks. At the same time, you should also be aware that corrections can occur after preliminary economic data is announced and take these into account in your trading decisions. Finally, one of the most important forex trading basics is learning to anticipate the news and start your trading just before the major action begins in order to avoid your orders not being executed due to the high volume of trades.