A rookie trader entering the forex markets needs some training on how to trade, as well as when to trade. Every trader’s objective is to catch the next price wave and determine what the future holds, and this is the root of the need for procedures and tactics to get a close look into the forex markets. Even though there are a variety of styles to monitor the markets, these are likely to be grouped under either Technical analysis or Fundamental analysis.
Technical analysis concentrates on the manipulation of past currency price data in order to see what is likely to happen in the future.
Fundamental analysis will provide an insight into the forex markets from an economic point of view. It is therefore highly weighted on the macroeconomic elements of markets, such as countries, and incorporates the use of economic data to evaluate the state of that market and hence predict future currency price movements. There is a wide range of economic indicators which, during their currency, have the power to move the markets immediately and with great force.
Economic indicators can be divided into the ones which are a direct measure of a market’s economy and the ones which indirectly give an economic sentiment about the market. A nation’s Gross Domestic Product (GDP), a measure of standard of living and also productivity, is a direct indication of the market’s economic health. Other direct economic indicators include a nation’s unemployment rate, such as the famous U.S. Non-Farm Payrolls (NFP) released on a monthly basis, and also retail sales. Because they come in absolute figures, they are also classified as quantitative indicators.
Indirect economic indicators provide insights into how market prices may be driven, and are viewed as qualitative measures. For example, geopolitical unrest in Egypt brings into question the continuity of oil supply from the Middle East to the Mediterranean Sea through the Suez Canal and therefore indirectly affects the price of crude oil as markets anticipate a possible shortage. Natural disasters and election results may also be considered as indirect economic indicators.
Various economic indicators are released on a weekly basis and more often than not forex markets react to them with zero or minimal movement, although some are more likely to inject volatility into currency prices. Employment is arguably the most important indicator for the health of a nation’s economy, and the market’s currency price usually reacts to monthly or quarterly changes in a given country’s workforce.
The Consumer Price Index (CPI) is a measure of price changes in a ‘basket’ of goods and services, and is also a leading measure of a nation’s inflation. Market participants follow closely the quarterly CPI releases to get an insight into the country’s economic activity, as the data can move the markets directly.
A country’s Consumer Confidence Index (CCI) indicates how consumers feel about the future state of the economy and, by providing hints on whether consumers are likely to spend, the CCI gives a sentiment on the economy’s future expansion or contraction.
Other important economic indicators include central banks’ monetary policy and interest rate decisions, as well as indicators measuring the state of housing markets.
An integral tool for fundamental analysis is the economic calendar, a schedule of future releases of economic indicators. Such calendars are provided by most online entities in the forex industry such as brokers and news sites, and forex fundamentalists are able to keep a close eye on upcoming data description, the release date and time, the markets involved and the indicator’s importance, together with past and expected data.
The state of a given country’s economy can’t be altered within a day, but many economic indicators can shift expectations about its future state. The effects of economic indicators are likely to be transitory but they are can have an instant impact on forex market prices following their release. This explains why fundamental analysis is widely used by market participants aiming to produce another successful trading position.
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