Developing A Trading Strategy Based on Fundamentals [Video]

When it comes to fundamental trading, major shifts in prices can often occur because of an unexpected news event or because expectations of news events are not met. Some forex-related news can affect the market as a whole while some will affect certain currencies in particular.

Economic data tends to be one of the most important catalysts for short-term movements in any market, but this is particularly true in the forex market, which responds to news from around the world. Typically, employment reports, interest rate decisions, and GDP numbers are what is considered important news for a country’s currency. These news are important because they can affect monetary decisions by central banks. If the data paints a picture of a strong economy for example, central banks will likely opt to raise interest rates which in turn typically causes their currency to rally.

 

Which News and Data Releases Impact the Forex Markets the Most?

Since the U.S. dollar is on the “other side” of 90% of all currency trades, U.S. economic releases tend to have the most pronounced impact on the market. It should be noted however, that trading the news is more complicated than it may first appear. Forex pairs can be affected by a number of different releases so predicting price direction is always speculative. Not only is the reported consensus figure important, but so are the forecasts and the revisions, other related releases and any major geopolitical developments that could also have an effect on the currency pair you are trading. That being said, news and data releases can provide some clues as to how the markets will behave but they should not be considered absolute.

 

Understanding Market Consensus

Market consensus is one of the most important concepts to understand when contemplating trading market news releases. Simply put, consensus refers to the average expectation of financial analysts and market participants for a particular economic report. As many analysts express their views, a general market consensus eventually forms, this is seen as the market “standard” against which the actual result will be measured. If the observed result is better than what analysts were expecting, related assets tend to edge higher in value. On the contrary, if the result turns out to be weaker than market consensus, then investors will be disappointed and prices will likely drop.

 

Using News Trading Tools

Perhaps one of the most important tools for a news trader is a well-rounded forex news calendar which includes all the currencies they intend to take their positions on. An economic calendar is used by investors to monitor market-moving events, such as economic indicators and monetary policy decisions. Investors will typically research the date and time of a specific event and pay close attention to the announcement because of the high probability that it will affect the direction of the market. You can find a detailed listing of all major future events along with their respective date, time, forecast, the underlying currency on BDSwiss’ Economic Calendar.

 

Knowing The Key Events

It is important to be able to understand the significance of each event and the level of impact it can have on certain currency pairs. The most sensitive releases that affect currency rates include the following:

• Benchmark Interest Rate Decisions: Central bank rate decisions cause the most volatility in currency pairs, especially when a change in key interest rates was unexpected.

• Inflation Data: The level of the price of goods in a nation can significantly affect central bank monetary policy.

• Key Jobs Data – Unemployment rates and the amount of people receiving benefits for unemployment provides a barometer for a nation’s economic growth. U.S. Non-Farm Payrolls data in particular, is one of the most closely watched economic indicators and can have a substantial market impact.

• Preliminary GDP Data – A country’s gross domestic product is one of the most important measures of an economy’s health and can also encourage monetary changes.

• Trade Balance and Current Account Data – Variations in the balance between a country’s imports and exports has a substantial impact on a currency.

 

The Importance of Maintaining a Diversified Portfolio

Financial experts sing the praises of a diversified portfolio. But maintaining a diversified portfolio requires great discipline, especially when it comes to trading a number of different asset classes. Understanding these intermarket relationships is essential for traders who wish to maintain a diversified portfolio and mitigate risk. By following multiple markets, an investor gets the “bigger picture” and is able to recognise significant market and economic changes.