In our blog, we talk a lot about technical analysis, patterns, features and prominent opportunities. And there is a good reason for that: technical factors are of great help when it comes to short-term trading. However, fundamental factors are just as important, as they account for massive price swings. Today we are talking about fundamental factor and their practical application in trading.
In the Forex market all currencies are traded in pairs. Each currency pair has the base currency (it comes first) and the quote currency (that comes second). To understand what is the right time to buy or sell a particular currency pair we will be using EUR/USD as an example. Here the EUR is the base currency and the USD is the quote currency. In other words, when buying the currency pair, you expect the Euro to appreciate against the American dollar. And vice versa, should the USD appreciate against the Euro you would want to sell the currency pair.
Fundamental Factors in Forex
What are the fundamental factors in Forex trading? National currencies mirror the performance of their respective economies. Important events, announcements and data reveals play a key role in determining the exchange rates. For example, the better the economy of the United States is doing, the more expensive the USD will become. Of course, major economic events will depend on the currencies you are about to trade. An important announcement, made by the Bank of England, could hardly move the USD but most certainly would influence the GBP.
Depending on the economy of each country traders can estimate whether or not to BUY/SELL the currencies of those countries. There are several key indicators to estimate the well-being of the country’s economy: GDP growth rate, interest rates, unemployment etc. All of them influence the exchange rates, though to a different extent.
But remember that a strong economy does not always mean a strong currency. A lot of countries manipulate the exchange rates in order to make domestically produced goods cheaper and boost exports.
Fundamental analysis comes with a lot of grey areas. Most events have a chance of influencing the exchange rates and nothing is set in stone. You could, therefore, take into consideration the signals that the market sends and analyze several factors before making the final decision.
Even after major economic events currency pairs rarely demonstrate substantial movement. In order to make their occupation viable, Forex traders turn to a multiplier. By using a multiplier, a trader can control a position that is greater than the amount of funds at his disposal. For example, when opening a $100 deal and using an x5 multiplier your potential profit (and loss) will be calculated as if you were investing $500. This option can turn out to be valuable, especially when the direction of the future price movement can be accurately predicted, but bears a higher degree of risk.
An economic calendar, a list of Forex-related events, can help a great deal to those interested in fundamental analysis. This feature can be found in the ‘Economic Events’ tab of the ‘Info’ menu (in the upper left corner of the price chart, just below the asset name). Since you are trading currency pairs when working on the Forex market, events that happen in this or that country will ultimately influence the exchange rate.
News can move the markets quite a lot, and national currencies are not an exception. It is important to remember, however, that financial markets react to the news in a blink of an eye and therefore, you should consider whether to trade dated news or not, as all information has already been factored in by the market. All major news, relevant to the asset you want to trade, can be found in the ‘News’ tab of the ‘Info’ menu. By doing it this way, you will only get the news related to a particular currency pair you are interested in.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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Credit: Vasiliy Chernukha