Fundamental analysis allows us to anticipate market developments over the long term, but also in the short term during major economic announcements. Some economic news announcements result in very rapid movements of currency pairs.
The study of macroeconomic data doesn't provide forex traders a specific indication of ideal points of entry or exit, unlike technical analysis, but it can be help these traders predict the direction of a trend. Moreover, the markets anticipate events and exchange rates are often a bit off from their actual values.
The economic health of a country depends on a number of factors such as its bank interest rate, unemployment rate, inflation rate and fiscal policy. Other data related to politics also has an effect on the market because it affects the level of confidence in a country's government.
Sometimes, governments intervene to increase or decrease the value of their currency, while doing nothing to stop rumours of such intervention; central banks can also have an impact on the forex market (usually temporarily) when they buy or sell currencies in order to limit inflation.
A good forex trader regularly consults the economic data calendar in order to know exactly when major economic data and reports are going to be published. However, it is common for financial markets to react in anticipation of these announcements; in this case, it's not the actual announcement that will have an impact, but the DIFFERENCE between the expected figure and the actual figure that is released.
A large amount of economic news is published daily, so it is not possible to monitor all of the indicators; you should only focus on those indicators that have a significant impact on the markets. Keep yourself informed of the major indicators, such as GDP, inflation (using the producer price index or the consumer price index), the number of jobs created in the U.S. (non-farm payrolls), interest rate announcements, etc., as these are the indicators that move the markets.
Each country has its own indicators that affect the value of the national currency. However, a trader should first examine what is going on with the US dollar, since US economic news often has a strong influence on the rates of other currencies.
Indicators should be compared with past data; they play a fundamental role in the financial markets. but it is the element of surprise associated with their announcement that impacts the markets, most published results are different from the forecast, the more 'short-term impact on the price of currency will be strong!
A market that is quiet before an economic news report or figure is released can be a sign that high volatility is about to appear. It is therefore better to wait a few minutes after the news is released before positioning yourself on the market.
Trading during news announcements requires lots of control and experience. The high level of volatility offers the opportunity to make quick profits, but you can also lose money fast. Use low leverage to trade the news.
It is very common for brokers to change their trading conditions during these news announcements. Before you trade during news, make sure that your broker doesn't subject its traders to slippage, spreads which widen considerably, resulting in your stop loss being hit even if the price doesn't hit it. When the news is released, the broker may also increase the minimum distance required to place a buy stop or a sell stop position as well as place a take profit or a stop loss. The possibility of placing an order may also be temporarily interrupted.
Generally speaking, no dealing desk, ECN and STP brokers are strongly recommended for trading the news.