What to know about forex trading (1)

‘Kunle Adeyeri

Happy New Trading Year to you all. I believe this is a year to take you to the next level. You have read much on technical trading in the last three or four articles. This week shall be on fundamental trading. In online forex trading and other online markets you are either a technical trader or fundamental trader or being a smarter trader by blending both.

Fundamentalists need to keep an eye on signals derived from price charts, while few technicians can afford to completely ignore impending economic data, critical political decisions or pressing societal issues that influence price action though this could prove disastrous at times for technical traders if care is not taken before market correction takes place.

 Fundamental analysis studies the core underlying elements that influence the price of a particular entity, like a stock or currency. It attempts to predict price action and trends by analysing economic indicators, government policy, societal and other factors within a business cycle framework. Fundamental analysis is very effective at forecasting economic conditions, but not necessarily exact market prices. Studying GDP forecasts or employment reports can give you a fairly clear picture of an economy’s health and the forces at work behind it. But you still need a method to translate that into specific trade entry and exit points. 

Fundamental drivers

The fundamentals include everything that makes a country and its currency tick. From interest rates and central bank policy to natural disasters, the fundamentals are a dynamic mix of distinct plans, erratic behaviours and unforeseen events. That said, not every development will move a country’s currency. The task is to identifying the most influential contributors.

Forex market drivers

The forex market is driven by a number of fundamentals, including interest rates and the prices of commodities such as gold and oil. 

Interest rates

A common way to think about interest rates is how much it’s going to cost to borrow money, whether how much we pay for our mortgages or how much we earn on our bond and money market investments. Interest rate policy is a key driver of currency prices and is a popular trading strategy for new currency traders. Fundamentally, if a country raises its interest rates, its currency prices will strengthen because the higher interest rates attract more foreign investors and vice versa. But during the recession period, it has been a lowering of interest rates by most central banks of key economies yet it propelled their currency. This was seen as a corrective measure by investors for such countries to strengthen the economy.

For example, higher rates in the Eurozone may prompt United States investors to sell US dollars and buy bonds in Euros. Similarly, if interest rates increase in Switzerland, those investors may decide to sell their Euro-bonds and move into bonds in Swiss francs (CHF), driving Euros down and Swiss francs up. In applying this to trading in a normal situation for example in a pair of GBP/USD if the Bank of England increases interest rate from the status quo this will cause the GBP to appreciate over the USD, hence it will be a wise decision to take a long/buy position in such pair.

Gold Price

Historically, gold is a “safe haven”, a country-neutral investment and an alternative to the world’s other reserve currency, the US dollar. That means gold prices tend to have an inverse relationship to the USD, offering several ways for currency traders to take advantage of that relationship. For example, if gold breaks an important price level, you’d expect gold to move higher. With this in mind, you might sell dollars and buy Euros, for example, as a proxy for higher gold prices. Australia is the world’s third largest exporter of gold, and Canada is the third largest producer worldwide. These two major currencies tend to strengthen as gold prices rise. You might consider going long (taking a buy position) in these currencies when gold is increasing in value, or trade your GBP or JPY for these currencies when gold is on the rise (meaning take a buy where GBP is the base currency and buy also where the JPY is the counter currency). 

Oil Price

Just as airlines and other oil-dependent industries are hurt by rising oil prices, so are the currencies of oil-dependent countries like the US or Japan, both of which are massively dependent on foreign oil. If you believe oil prices will continue to rise, you can consider buying commodity-based economies like Australia or Canada or selling oil-dependent currencies. It will be a surprise to you to know that any problem in the Niger Delta region of our country, Nigeria affecting oil production will have effect on the currency market being the sixth largest producer, imagine what it will be when trouble brews in Iran, Iraq, Saudi Arabia or Kuwait or the Middle East as whole.

 Natural disasters

Natural disaster like earthquakes, hurricanes, tsunamis will have a devastating effect on the currency of a country where this occurs.

Reference (www.forex.com)


  • Uche

    Good article………..

  • sam

    thhanks, for your comment .

  • tripple kay

    keep it up.