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GDP and its impact on Forex market
Written by: PaxForex analytics dept - Sunday, 01 September 2013 0 comments
One of the most important factors for any economy is the Gross Domestic Product - GDP. In its essence, it reflects the economic situation of the state as a whole and has an impact on the value of national currencies, monetary policy, the price of shares in companies and stock indices.GDP is the total market value of all final goods and services produced in all sectors of the economy for a given period (month, quarter or year). In this case, products and services may be made for any purpose - domestic consumption, export, stockpiling and by using any of the factors of production (labor, equipment, raw materials).
American economist Simon Kuznets during the Great Depression in 1930s has invented the research of a state of the economy through national product. Today practically all countries of the world are using it. The date and time of release of GDP data, as well as most of the other fundamentals are known in advance.
GDP and financial markets Decline in GDP is a signal of poor condition of the economy, which, as a rule, leads to the depreciation of the national currency. GDP growth leads to an increase of a currency in Forex market. Strictly speaking, the data on GDP itself has a quite limited effect on the financial markets, as all indicators included in it, become aware of the market in advance. For traders, it is important not the value of GDP but the dynamics of this indicator in comparison with previous periods: on how GDP increased or decreased in comparison to the previous accounting period or same period last year, etc. The biggest market reaction causes the GDP data of the United States, Great Britain,
Japan and the euro area. The dynamics of the GDP of these countries should be carefully monitored by all traders because they affect the mood and trends of the global financial markets as a whole. But, of course, you should pay special attention to the GDP of those countries whose currencies you are using the most. For example, if you prefer a pair USDJPY, the most important for you will be American and Japanese GDP.
In addition, given the fact that Forex trading is conducted in currency pairs, it is important not only the dynamics of the GDP of one country, but also the ratio of gross domestic products of the two countries whose currencies are paired.
Another important point is the market's expectations. If the actual GDP value differs from the forecasted, it comes as a surprise to traders and causes a stronger reaction of the market and, therefore, provides more opportunities to capitalize on the news. Thus, the output of GDP can both enhance existing trend and generate a new one. Key points in trading on the basis of fundamental analysis are understanding of how the data, in this case the GDP, effect on Forex, the ability to enter the market on time and preparation of strategies for different cases in advance.
Trading algorithm on the basis of GDP data: - Watch the economic calendar. Find out the date and time of the GDP release of countries of interest to us. - Make different trading strategy in case if the GDP grow, fall or remain unchanged. Check the possible entry points for every occasion. - Compare the actual data of the past with the expected, as well as with each other. - Open a transaction. - Fix a profit