As an online trader in the foreign exchange market (forex)…
… your trades can be based on fundamental, sentimental, or technical analysis. These are the same tools that stock market day traders use. The difference between the two traders is, stock market trading is based on company value and the forex market is based on the value of a country’s currency. But countries don’t have balance sheets, so fundamental analysis has to be tweaked to be a useful tool for online traders in the Forex market.
At the basic level, fundamental analysis deals with the intrinsic value of an investment. When you look at the Forex market through the fundamental lens, it means considering the economic conditions that play a part in the value of a country’s currency. The basic tools are economic indicators, Gross Domestic Product (GDP), retail sales, industrial production, and the Consumer Price Index (CPI).
Economic indicators generally come in the form of reports from the government or from private organizations. They summarize and measure a nation’s economic performance. They can be reports on unemployment numbers, housing statistics, manufacturing and wholesale sales, GDP, and a variety of other statistics. With the release of these reports, the Forex market often spikes or falls dramatically. One of the significant reports is the GDP.
The GDP is the complete market value of the goods and services that a country produces in a year. Since the GDP is actually a lagging indicator, many traders focus on the two reports that precede the GDP, the Advance Report and the Preliminary Report. If there are significant differences between the two reports, the market can become very volatile.
The next significant reports are the Retail Sales and Industrial Production reports. As the name implies, the retail sales report covers the retail sales of a nation. The Industrial production report covers the change in production of factories, mines and utilities. These reports can be used to “predict” the direction of the economy. Positive reports reflect positively on the country’s currency. Conversely, negative reports have the opposite effect. Either way, if you predict the direction the currency is most likely to move, you are “in the money.”
Although there are dozens of reports that day traders can use, the final one we’ll discuss here is the Consumer Price Index (CPI). This is a measure of price change in consumer goods in 200 different categories. When traders use the CPI in combination with the nation’s export figures, you can determine whether a country is making money or losing it.
So how do traders take advantage of all this information and still have time to trade? Many traders use an economic calendar, so they know when the reports will be released. If you trade slightly after the reports are released, there’s a good chance you’ll collect some winning trades.