Economic factors drive the globalised Forex market, playing a far greater role in the market than ever before. Several economic factors influence the continually moving market. For traders who trade fundamentals, economics are especially vital as they profoundly affect major turns on the chart. Among economic factors, we can find the role of macroeconomics, capital markets, international trade, political impact and economic releases.
Let's study each factor and dive into the world of fundamentals
Macroeconomics are important because they touch upon the health of a nation's economy and consequently the value of its currency. Macroeconomics influence a trader's decisions and ultimately determine the value of the currency at any given time. However, let's not forget that economic health is shaped by various events and information that may change on daily basis.
Among these events and information are capital markets, the most visible indicators of an economy's wealth. It's not easy to miss the release of public information in capital markets, as there is a steady flow of media coverage nowadays with up-to-the-second information on dealings of corporations, institutions and government entities.
International trade and political landscape also play a significant role in Forex. International trade determines the value of the currency, as it looks at the increased demand in currency, as well as trade surpluses and deficits. Political impact plays a major role in the economic outlook of a country, and consequently the value of its currency.
Lastly and most importantly, economic releases, which are the backbone of a Forex trader's playbook. Economic reports drive the fast-paced marketplace. For instance, GDP, which is one of the most well-known economic reports, as it indicates a country's performance and strength is a lagging indicator as it reports on events and trends that have already occurred. Another one is inflation, as it sends a signal of increasing price levels and falling purchasing power. It's a double-edged sword, however, as many traders are of the opinion that it is placing downward pressure on a currency due to retreating purchasing power, but on the other hand, it can lead the currency appreciation, as it may force central banks to increase rates to curb rising inflation levels. Consequently, inflation doesn't have a straightforward so to speak effect on the currencies.
Economic releases are the backbone of a Forex trader's playbook.
Other releases also carry essential information, such as employment levels, or retail sales among others — all of this complement the abovementioned factors.
How does one prepare to trade events in Forex?
If you are a trader who believes that the chart reflects fundamentals, then it's important to keep an eye on Forex news. The unexpected news that causes major turns on the charts happens often.
By following the news closely you will notice that some news affect the market as a whole, while others just specific currency pairs. That way you'll know what news is relevant to the currency pair you're trading.
Once you know what news affect your trading, you need to watch the reaction to the numbers for a while. This means waiting, and it's vital because sometimes currencies do not act as you would expect. If you observe that the currency reacts opposite of what you expected it's due to market expectations or market sentiment.
Once you figure out how a report will affect a currency, you can prepare for live news trading. Of course, you need to ensure risk management.
What is important to understand however is that each broker will handle trading during news differently. Meaning, that each broker has a different policy on trading during volatile news time.
Another thing to consider is the spread your broker is offering. Trading with a fixed spread can be pretty pointless if you're looking to get out short term, especially if you're faced with slippage or a requote.
On the other hand, the floating spread can increase exponentially, and this can cause your trade to be immediately negative, even if technically you received a good price on your entry. Here you must also know that spread widening is often limited, and if the spread is too wide, it may be best to abort your trade. Hence, widespread is seen when banks think the risk is too high to be exposed.
What you can do is try trading on a demo account to see how your broker deals with news trading, having regard to the policy in place. At OctaFX demo account mirrors the live account so you can have a pretty good idea of what it'll look like.
News trading can be exciting but is also dangerous, so never underestimate the impact of the report. If you're not experienced enough, do not try trading the news, and if you do, always implement risk management. Another thing to keep in mind is that you shouldn't trade the news unless you're trading long term.
Then again, some traders have their strategy and method, and some of them can profit from trading the news, both long and short term, but this is because they pay close attention and are quick. If you're interested in trading during news releases keep all of the above in mind and make sure to be as agile and careful as possible. Best of luck!