Forex Trading Fundamentals
As the largest financial marketplace in the world, the Forex trading market is affected by an incredibly diverse amount of factors. These market fundamentals are the key pieces to determining when a currency is going to rise in value and when it's going to fall.
Here's why it's vital to pay close attention to market fundamentals when you're trading on the Forex:
- Trading on leverage magnifies every gain and loss you make. This makes it imperative that each trade is made with the newest and best information possible.
- Forex is a 24-hour market during business hours, so you never know when a critical piece of information is going to affect the marketplace.
- You have to beat the spread on each trade that you make. Making random plays with incomplete information will not often result in gains.
- Publicly traded companies have to make information publicly available, but countries and currencies don't. If you aren't paying close attention to the right fundamentals, you'll be no better off than somebody with no information at all.
Here are the most important Forex trading fundamentals that every trader needs to keep in mind:
Interest rates are critical to Forex trading because they affect your trades in two distinct ways. First, a country's interest rate is a clear indicator of the strength of their currency. Lower interest rates strengthen a currency and encourage internal growth as businesses can borrow more money to invest in themselves. Higher interest rates discourage growth and could be the sign of a weakening economy.
Interest rates are also important when you buy currency that has a high interest rate using a currency that has a lower interest rate. This is known as a carry trade, and when you conduct one, you earn the difference between the two interest rates. If too many people begin taking advantage of this, however, the interest rates usually begin to reverse course.
Economic indicators reflect the health of a country's economy, and they can be released by either the governments themselves or a private organization. Like organizational reports, these economic indicators are released in regular intervals. Just as with the stock market, any significant deviation from the expected figures will lead to widespread market adjustment.
These are the major economic indicators:
- Industrial production. This shows how much is produced by a country and includes things like natural mines and industrial factories.
- Retail sales. This report details exactly how much was spent at retail stores throughout an entire country in a given time frame.
- Consumer price index. Also known as the CPI, this measure changes of over 200 different consumer goods in a given country. You can figure out whether a country is losing or making money overall by comparing this report to its exports.
- Gross domestic product. A country's GDP is one of the most important economic indicators of all. It represents a country's absolute value of everything produced in a year. GDP includes both goods and services. The GDP is considered to be the best overall indicator of a country's year-over-year growth.
Employment numbers are useful when evaluating currency because they are a good indicator of economic strength. Employment is useful because it directly affects the amount of money consumers are willing to spend. In turn, this affects the currency's spending power and inflation, which plays a part in determining interest rates.
Commodity prices also have a direct effect on currency prices. Canada, for example, exports a great deal of natural oil. If oil prices trend upwards, it's a good sign for the Canadian dollar. If demand for oil drops, however, it's a sign that the CAD may begin to trend downward. On the other hand, a country that has to import most of their oil will suffer as the price of oil climbs.
It is very important to take the time to learn which commodities affect each currency. Each commodity is slightly different, and the higher in demand a commodity is, the more it will affect the Forex market.
Now that you have a solid understanding of Forex trading fundamentals, make sure to create an account with us today. If you are able to carefully monitor interest rates, economic indicators, employment numbers, and commodity prices, you'll be making money on Forex in no time!