The key to making money in the Forex Trading is understanding what makes currency pairs move. Well, it’s the fundamentals that make currency pairs move but yet not all the economic indicators are important. So which are the ones that can really shake the currency market? Below are some of the important ones which you can use as forex trading strategies:
1. Interest Rate: This is the most important economic indicator and it rules the forex market.
Economies with higher interest rates tend to have stronger currencies and investors are always looking for the greatest possible investment returns.
You will realise that if there is any changes to the interest rate to countries like United Kingdom, Europe, U.S etc, be it cutting or raising, most of the time there will be big movements in the forex trading market.
For example, if Europe has an interest rate cut, investors will sell Euro, which has a weaker currency now and invest in Great British Pound instead, which has a higher interest rate.
Central banks have to raise interest rate if there is too much inflation and you have to watch these two economic inflation indicators as the central banks will be looking at it too:
2. Consumer Price index(CPI): The higher the index is, the stronger the economy will be. Thus, forex traders may push the currency of that particular country higher if they find confidence in the index.
3. Producer’s Price Index(PPI): If prices for producers are rising, they will most likely pass those costs onto consumers. This lead to higher inflation and stronger currencies.
4. Gross Domestic Product(GDP): It is reported quarterly and is the primary indicator of economic strength. A higher GDP is often associated with higher interest rate, which is frequently positive for the currencies.
A forex trading tip: Sometimes you may see a currency pair dipped drastically because the actual results of the GDP is much lower than the forecast, so you might want to consider following the trend and sell that currency pair.
5. Payroll Employment: Monthly measure in payroll employment reflects the number of new jobs created or lost and is an important indicator of economic activity. In forex markets, large increases in payroll employment means that the strong economic activity could lead to higher interest rates, which is seen positive for the currencies.
6. Retail Sales: It is a measure of the total receipts of retail stores and is a major indicator of consumer spending. Rising retail sales are associated with a strong economy, which leads to rising currencies.
7. Durable Goods Orders: It is a measure of the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. It is a major indicator for manufacturing sectors. Rising durable goods orders are associated with a strong economy which leads to stronger currencies.
You may learn to trade forex by catching some good opportunities when there are news releases for the above economic indicators. Although the forex market is fundamentally driven, the best way to trade forex is to combine them with forex technical analysis and a forex trading system, which can be found in my “Forex Trading to Riches” ebook.