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Macroeconomics Influence in Forex Trading
Written by: PaxForex analytics dept - Tuesday, 06 February 2018 0 comments
The forex market is primarily driven by overarching macroeconomic factors that influence the decisions of the traders who ultimately decide the value of a currency at any given point in time. The economic health of a nation's economy is an important factor in the value of its currency. Overall economic health, however, is shaped by numerous economic events and information that may change on a daily basis, contributing to the 24/7 nature of the international foreign exchange market.
Macroeconomics plays an important role in forex trading. This is essentially what fundamental analysis means: interpreting economic events, news, and releases with the purpose of speculating on the future moves a currency will make as a result. The currency trader should look at the forex dashboard and see those currencies as economies. They are effectively representing an economy, country or region in the world. It means that understanding how a respective economy is performing entails having an idea about the direction the currency is going to move in.
Macroeconomic broad-based information can be gained from such things as the official reports of the nation’s themselves. But beware, not every country releases accurate information about how they are doing. Inflation is a good macroeconomic force to consider, as it may be an indication that the government is purposely degrading its currency by printing money or through other means. Other relevant broad-based indicators
include employment figures, overall sales in various sectors and manufacturing strength. So always remember, consider the big picture when formulating your trading strategies.
When trading is based on macroeconomic news/events, then the time horizon for those trades should be considered. This means that traders consider a longer period of time when planning their trades, and this is typically what investing means. When investing, traders do not consider the day-to-day economic releases, but the shifts in the macroeconomic picture. For these shifts to come into play requires time. All costs associated with such a trading style are considered here, one good example being the swap that is paid. If the swap is a negative one, then keeping a position open for a long period of time is a costly process. These costs should be considered, as they will affect the balance in the trading account.
Economic reports are the backbone of a forex trader's playbook. Maintaining an economic report calendar is crucial to staying current in this ultra-fast paced marketplace. The forex market is ultimately driven by economic factors that, in turn, are indicators of a country's economic strength. The economic outlook for a country is the most important determinant of its currency's value, so knowing the factors and indicators to watch will help you keep pace in the competitive and fast-moving world of forex.