When to Buy or Sell Forex?: At forexamy, we often talk about technical analysis, patterns and features highlighted opportunities. The thing is that traders should never lose sight of fundamental factors, as they are responsible for massive price changes. Today we will talk about fundamental factors and their practical application in trading.
In foreign currency markets, all currencies are traded in pairs. Each currency pair has a base currency (going first) and a quoted currency (going second). To understand when is the right time to buy or sell a particular currency pair, we will use the EUR/USD as an example. The EUR is the base currency, while the USD is the quote currency. In other words, when you buy this pair, you expect the Euro to appreciate against the US Dollar. Conversely, if the USD appreciates against the Euro, you must sell the currency pair.
Fundamental Factors in Forex
What are the fundamental factors when trading Forex? National currencies reflect the performance of their respective economies. Major events, announcements and data releases play a key role in determining exchange rates. For example, the better the U.S. economy, the more expensive the USD becomes. Of course, the main economic events will depend on the currencies you want to trade. An important announcement, made by the Bank of England, could displace the price of the USD but is most likely to influence the GBP.
EUR/USD pair after a major announcement
Depending on the economy of each country, traders can estimate whether or not to BUY/SELL the currencies of those countries. There are several key indicators to estimate how well a country’s economy is doing: GDP growth, interest rates, unemployment, etc. All influence exchange rates, although to a different degree.
Remember that a strong economy does not always mean that the currency is strong; many countries manipulate exchange rates to make domestic products cheaper and thus boost exports.
Fundamental analysis has many shadows. Most events can influence exchange rates but nothing is written in stone. Therefore, you should consider the signals sent to you by the market and analyze several factors before making your final decision.
Things to keep in mind
Even after major economic events, currency pairs rarely show substantial movements. To make their work viable, Forex traders use multipliers. By using a multiplier, the trader can control a position that is much larger than the amount of funds at his disposal. For example, when you open a $100 trade and use an x5 multiplier, your potential profit (or loss) will be calculated as if your investment was $500. This option can be very valuable, especially when the direction of future price movement can be accurately predicted, but carries a higher degree of risk.
The list of events in the economic calendar
An economic calendar is a list of Forex-related events, which can greatly assist those interested in fundamental analysis. Since you are trading currency pairs while working in the Forex market, events that take place in one country or another will ultimately influence the exchange rate.