Knowing all about foreign exchange basics is vital if you want to make money in currency trading.
It’s so important to have a good all round knowledge about forex trading. If you specialise in technical analysis you will have a good understanding on how charts and trends will make you money, but having a sound knowledge of the foreign exchange basics is also very important or you could find yourself in a position where you enter trades at the the wrong time.
It is so important to keep your knowledge of national and international news up to date as the forex markets can change rapidly in response to major news changes. Rapid changes in financial news can produce major swings in the market and can seriously affect your trades.
For example a disaster such as a major earthquake or terrorist attack is usually unpredictable but could affect currency values. There is not much you can do about this except always to be sure to use stop losses.
A more predictable event would be the announcement that the Olympic Games will be held in a certain country. This could strengthen confidence in that country’s economy and lead to a rise in the value of its currency. At the same time the other major contenders for the Games may suffer a fall in currency values. So it is important for a trader to know when an announcement like that is expected, and which countries are involved.
Similar situations are the financial reports that are released almost daily in many countries. Less regularly, but usually foreseeable, there will also be announcements about interest rates, inflation, gross domestic product and other matters of national economic importance.
Try to avoid trading on rumors. You might see news reports or hear other traders speculating that an announcement will go one way or the other. Do not trade on the basis that they are right. First because they still could be wrong, and second because if it is such a sure thing, the price has probably already changed to take into account the rumors and you will not gain much even if they are right.
Do not forget that you are always trading on two nation’s currencies, not just one. If your own country is one of them, you will have much easier access to financial reports for that currency and it is easy to forget to check on events in the second country.
This is particularly true for Americans because dollar news tends to dominate the forex alerts anyway. It is even more true if you are trading the dollar against a minor currency. You may have to take positive steps to ensure that your information is not one-sided.
Even if you are just beginning as a forex trader, it is important to keep in mind these aspects of fundamental analysis for the forex market. Exiting the market before any major announcement is usually the best move for a beginner.
As you become more experienced you may develop a system based on this type of fundamental analysis, but it is important to become familiar with all of the foreign exchange basics first.