The forex exchange market is made up of individual currencies from countries all around the world. What moves the currency markets is based on the concept of supply and demand.
Basically, what this means is that at any given time there is more of a demand for some currencies (meaning investors want to buy them) and more of a supply (meaning investors want to sell them) for others.
If you want to make sure you’re trading the right ones at the right time, you need to start analysing individual currencies first before you start looking at pairs.
Take for example, the EUR/USD pair, if you were to BUY this pair you are buying the Euro and selling the Dollar and if you were to SELL this pair, you are selling the Euro and Buying the Dollar.
So, on this basis, identifying which individual currencies are currently in demand and which are currently in supply will help you match the right two currencies together.
Demand for a currency is a signal of confidence in that country. Supply of a currency is the opposite and seen as a lack of confidence in the economy of that country.
Below are two of the main triggers that cause supply or demand for individual currencies:
1. Positive or Negative economic news
2. Political News in a country that is perceived as positive or negative
Let’s say we have a strong employment report in the USA, which means, more jobs and possibly higher wages.
This is positive news for the US economy and should strengthen the US dollar, so we want to BUY the Dollar.
It is important to identify what is happening other individual currencies that we want to match up our dollar with because if we are buying the dollar we have to be selling some other currency at the same pair.
Let’s use the EURO as an example, if we are considering trading the EURUSD we need to look at what is currently happening in the EURO zone?
a. Strong (Euro)
Say we also have strong employment numbers from the Euro Zone. This would mean we have two strong currencies (Both the Euro and the Dollar).
If both are showing strong demand due to both countries having positive news it is best to avoid trading this pair has both will have demand which means they tend to cancel each other out.
In this circumstance we would look to find an alternative currency to trade against the dollar.
b. Neutral (Euro)
If there is no positive or negative news currently coming from the Eurozone the EURUSD pair might be worth considering to trade.
We don’t have to be concerned with euro strength which is good but before we trade it, we might want to look for better alternatives.
c. Weak (Euro)
If we have negative news from the Euro zone at the same time as positive news from the USA, this is the ideal match. We are buying a currency in demand (the US Dollar) and selling a currency in supply (the euro)
Strong versus weak is the ideal situation match. Always look to match a strong currency against a weak currency as this pairing offers the strongest opportunity that the trade will work out and the profits will follow.
As we already mentioned, there are hundreds of daily, weekly and monthly reports that make fundamental analysis a bit cumbersome to follow. Since trading forex, however, is a highly liquid market, it takes highly influential statements to move the market in the short term. As such, retail online trading focuses on 3 main fundamentals which have the power to affect the market substantially:
NFP
The NFP is first on the list because it is arguably the most high-impact piece of news on the monthly calendar. Every forex trader needs to keep an eye on this report since the market always reacts wildly during its release. Even if you don’t enjoy the high-risk high-reward volatility the NFP presents, you still need to be aware of its upcoming release in order to avoid trading forex during that time.
The reason why NFP has such power over the financial markets is because it provides an accurate metric of the employment rate in the US and therefore it can instigate huge price spikes in mere seconds – in both the USD and gold.
Watch the calendar for NFP’s release, on the first Friday of every month by the United States Department of Labor.
Inflation metrics
Inflation is a measure of the price of goods and services and how that changes over time. In layman’s terms, cost of living in a country. Low inflation means your money has more buying power and as such it is a highly preferred status quo. Central banks need to control inflation with their monetary policy in order to balance out an economy’s growth.
When the value of a currency runs rampant, the central bank will tighten its policies to try and halt inflation. On the other hand, when the economy needs a boost, the bank will likely loosen its monetary policy to promote growth and expansion. Therefore, knowing where inflation is headed during a time period is a great opportunity for a forex trader since it provides insight on the central banks’ next move.
If you want to be informed about inflation rates, the CPI report comes out every month on different days, so keep an eye on your calendar.
GDP
Finally, the Gross Domestic Product index or GDP provides the most extensive look into an economy. It’s a highly important indicator in forex trading because it reflects the country’s growth as a whole.
The GDP is published in quarterly intervals and affects currency pairs both in the short and long term. If the GDP sees increased growth, it has a positive impact on the forex trading market. If the report, however, shows growth that doesn’t correlate with the initial expectations, it’s likely to have a negative effect on the currency’s rates.
Online trading with currencies and commodities is a speculative market and forex traders have found success using various methodologies of analyzing and interpreting relevant financial data for their advantage.
These fundamental indicators always provide opportunities for the aggressive investor, but you should always be cautious when trading during these events as they inject high volumes of volatility and an incorrect assessment of the market could easily mean the loss of your invested capital.
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