CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The Forex market is subject to extreme speculation as it is the biggest and most liquid market in the world. Over five trillion dollars are changing hands daily and there are more and more players that are joining this market. Trading the Forex market implies buying or selling a currency pair. When a trader buys or goes long on a currency pair, the expectations are that the price of that currency pair will increase and therefore a profit is being made based on the difference between the entry and exit levels.
Costs associated with trading, like broker's commissions and fees influence the profitability level, but the potential returns are still enough to drive more and more people to the trading arena. Traders are buying or selling a currency or currency pair with different expectations and for various reasons.
Buying or selling of a currency pair is being done based on technical or fundamental analysis, or both. Technical analysis deals with forecasting future prices based on previous patterns that formed in the past, while fundamental analysis deals with interpreting market news and economic releases to find out if a currency should increase or decrease in value.
Therefore, based on the above, traders are either technical or fundamental or both. It is being said that technical and fundamental analysis should be used together to correctly interpret where a currency pair is heading.
A currency pair is having two currencies that represent two different economies. If an economy is in a better shape and growing, and the other economy as represented in the currency pair is not doing the same, then the currency pair will move to show this difference.
From this point of view, trading a currency pair is based on comparing the two economies the currencies represent. Comparing economies means to use fundamental analysis before taking a trade.
There is an economic calendar that is almost mandatory to be used by any Forex trader. The information is free and economic releases are scheduled each week.
Traders will know in advance what economic news will be released next week, what currencies will be influenced, what is the forecasted value, etc. This allows planning for the period ahead to be properly done.
Out of all economic releases, central banks meetings are the most important ones. Central banks around the world are holding regular meetings to assess the state of an economy.
For example, the Federal Reserve of the United States is meeting every six weeks to assess the state of the U.S. economy, to see how economic indicators changed in the past six weeks and to set the appropriate monetary policy for the period ahead (the following six weeks).
These meetings are subject to extreme volatility and speculation as when it comes to Forex trading, interest rates are all that matters for a currency to move. Higher interest rates will result in the currency to appreciate, while lower interest rates will have the opposite effect on a currency.
The interest rate level is set by the central bank, so the outcome of these regular meetings is highly scrutinized by traders to see when the central bank is planning to move on rates, what are the reasons why rates are kept on hold, and, in general, what is the overall monetary policy for the period ahead. Currency pairs are moving aggressively when central banks are releasing their monetary policy statements or when press conferences after the meetings take place.
Central banks around the world have a mandate, and this is related to inflation levels. It is considered that, for an economy to have a healthy growth, a 2% inflation level is targeted.
A general central bank's mandate will be to keep inflation below or close to two percent. There is an indirect correlation between inflation and the value of a currency.
As a rule of thumb, when inflation is rising (maybe due to higher oil prices), the central bank will come and raise the interest rate level to combat higher inflation. This will result in the currency to appreciate, as everyone wants to own a currency that pays a higher interest rate.
The opposite is true as well: when inflation is moving below the central bank's target, the interest rate will be cut and the currency will suffer. Therefore, knowing the inflation level, when it will be released and the implications that result from it is a crucial thing for correctly interpret the move of a currency pair.
CPI (Consumer Price Index) is the economic release to watch. It is being watched monthly, but it is also compared on a yearly or quarterly basis as well. Huge fluctuations in inflation levels are met with heavy selling or buying of that respective currency as traders position for the next central bank’s meeting outcome.
A healthy economy produces jobs and rising jobs numbers are indicating a growing economy. An economy that grows produces inflation, and inflation causes changes in interest rates, therefore volatility in the currency market. Jobs data is released monthly and, in some cases, it is part of a central bank's mandate. The biggest central bank in the world, the Federal Reserve of the United States, is having a dual mandate: inflation should be below or close to two percent, while jobs have to be created.
It means the Fed will move on interest rates also based on how the jobs market is changing. Because the U.S. dollar is the world's reserve currency, what happens with the interest rates in the United States is influencing all the currency pairs.
Other things that have a fundamental impact on a currency or economy are PMI's (Purchasing Managers Index), GDP (Gross Domestic Product), press conferences central bankers hold, Retail Sales, etc. All these economic indicators are being closely watched to correctly interpret when the next change in interest rate is coming.
Besides those mentioned above, there are also political events like elections or referendums, not to mention wars or natural cataclysms that result in currency prices fluctuations. Because of that, it is difficult to assess the true value or impact of any fundamental analysis process.
Compare CFD brokers
