If you are not keeping up with what is happening around the world on a daily basis, your Forex account will suffer. Natural disasters, wars, and even massive loss of crops overseas can affect the currency pairs you work with. To avoid losing your money because of an earthquake in Chile, you have to pay attention to worldwide events and learn from history what kind of affect they have on the currency pairs you trade.
A currency’s value is affected by a large number of factors, but the most influential is the nation’s export business. This directly relates to the supply and demand of their currency. It is this constant shift in supply and demand that makes the Forex market the fastest moving of all exchanges. The others are not affected as quickly and so much by world events that currency trading is.
There are typically three different news categories that will have an affect on the value of a currency:
- Politics: Political events and conflicts are largely responsible for how a nation’s currency is reacting in the market. For example, political unrest in the Middle East has a direct relation to the value of the Canadian dollar as Canada also is an exporter of crude oil.
Obviously you would expect that political turmoil and instability is going to have a negative effect on its economy and on the movement of its currency. While you may not be trading that nation’s currency directly, you have to look at how it may affect those that you do.
Don’t take that to mean that you should start trading an unfamiliar currency because the news is reporting a new government that is making positive changes in the economy. You still need to stay away from directly trading these currencies, you just have to learn how their politics are making your currencies move.
- Economy: This of course is a no brainer and the reason why all of those reports are so important to keep up with. Remember though, that with Forex trading it all can change in a blink of a pip, so besides all of those reports you have to be paying attention daily to economic news. Especially when it pertains to the fiscal well being of a nation whose currency you consistently trade.
Even seemingly irrelevant events such as major mergers will affect your currency. If a large American company were to merge to one in Canada, the value of the currency in both nations will change. Pay close attention to economic news every single day to keep up with the fluctuations of your currencies.
- Natural Disasters: For the Forex market, a natural disaster can be as large as a tsunami or as small as not enough rain in Central America. Unexpected weather events will have a direct impact on currency, especially if they interfere with the export of goods from that country.
A natural disaster will also jeopardize the infrastructure of a country, causing an unstable economy. In the aftermath of a major weather event in any part of the world, you must keep your eyes on the financial news from that part of the world and pay attention to how it is changing the movements of your currencies.
As you know, despite the vast number of currencies, there are typically only eight that are traded regularly. And of the possible pairs created by eight, close to 90% that are traded regularly have the US dollar on one side. Still though, the value of the US dollar can change from events that take place on the other side of the world.
In addition to daily news about events in the world, there are certain economic reports issued on a weekly basis that are indicative of the fiscal state of that particular country and the health of its currency. Using these as part of your trading strategy is known as fundamental analysis. The most important that you should be looking at include:
- Interest Rates
- Industrial Production
- Retail Sales
- Trade Balance
There are also a number of surveys done on a regular basis that are used to give an idea of the consumer sentiment and confidence level in that particular country. When you combine those surveys with the regularly released economic information and current events, you have a full menu of data that can be used to help you with your trading decisions.
The easiest and fastest way for a new trader to process all of this information and learn how it affects currency values is by sticking to one pair when first starting out. I always recommend EUR/USD as a great place to start as the news tends to put a lot of focus on both of these currencies, and they are both very fluid. Also, they typically react to major events in a consistent way, making it easier to see and track the trends.
Keep in mind, that you are just one of millions of Forex traders who are watching the news and reading reports. Expect to see a lot of movement immediately afterwards. Instead of reacting to news, you want to learn how to act on impending fluctuations. If you are paying attention to what is going on all around the world, you can learn how to accurately predict what those reports are going to say and get your trades in place before everyone else does.
There is a lot of information out there that can help you make successful trading decisions each day. The trick is in learning what to look for, and what type of impact that it will have on the market. The best way you can accomplish this is by focusing first on only one pair, learning all of its tricks and the events that control its movements.Get the 5 most predictable currency pairs