Interest Rates Interest rates changes are one of the biggest fundamental catalyts out there. Heck, you could even say that they make the forex world go 'round! The Who's Who of the Central Bank Central banks are like puppeteers. They have full control over monetary policies and their words can move markets in an instant. Long-term Market Movers As with personal relationships, it's important to consider long-term factors in trading.

They may hold the key to your happiness! News and Market Data In forex trading, you've got to keep up to date with the latest news and market data to stay alive. Be in the know by checking out these market info tools!

Market Reaction A super duper important report just came out Now what?! Along your travels, you've undoubtedly come across Gulliver, Frodo, and the topic of fundamental analysis.

Wait a minute We've already given you a teaser about fundamental analysis during Kindergarten! Now let's get to the nitty-gritty! What is it exactly and will I need to use it?

Well, fundamental analysis is the study of fundamentals! That was easy, wasn't it? There's really more to it than that. Soooo much more. Whenever you hear people mention fundamentals, they're really talking about the economic fundamentals of a currency's host country or economy.

Economic fundamentals cover a vast collection of information - whether in the form of economic, political or environmental reports, data, announcements or events. Fundamental analysis is the use and study of these factors to forecast future price movements of currencies. It is the study of what's going on in the world and around us, economically and financially speaking, and it tends to focus on how macroeconomic elements such as the growth of the economy, inflation, unemployment affect whatever we're trading.

Fundamental Data and Its Many Forms In particular, fundamental analysis provides insight into how price action "should" or may react to a certain economic event.

Fundamental data takes shape in many different forms. It can appear as a report released by the Fed on U. existing home sales. It can also exist in the possibility that the European Central Bank will change its monetary policy.

The release of this data to the public often changes the economic landscape or better yet, the economic mindset , creating a reaction from investors and speculators. There are even instances when no specific report has been released, but the anticipation of such a report happening is another example of fundamentals.

Speculations of interest rate hikes can be "priced in" hours or even days before the actual interest rate statement. In fact, currency pairs have been known to sometimes move pips just moments before major economic news, making for a profitable time to trade for the brave. That's why many traders are often on their toes prior to certain economic releases and you should be too! Generally, economic indicators make up a large portion of data used in fundamental analysis.

Like a fire alarm sounding when it detects smoke or feels heat, economic indicators provide some insight into how well a country's economy is doing. While it's important to know the numerical value of an indicator, equally as important is the market's anticipation and prediction of that value.

Understanding the resulting impact of the actual figure in relation to the forecasted figure is the most important part. These factors all need consideration when deciding to trade.

Don't worry. It's simpler than it sounds and you won't need to know rocket science to figure it all out. I suggest you visit Pip Diddy's daily economic roundup every day so that you can stay in the loop with the upcoming economic releases.

Fundamental analysis is a valuable tool in estimating the future conditions of an economy, but not so much for predicting currency price direction. This type of analysis has a lot of gray areas because fundamental information in the form of reports releases or monetary policy change announcements is vaguer than actual technical indicators.

Analysis of economic releases and reports of fundamental data usually go something like this: "An interest rate increase of that percentage MAY cause the euro to go up. dollar SHOULD go down with an indicator value in that range.

The market has a tendency to react based on how people feel. These feelings can be based on their reaction to economic reports, based on their assessment of current market conditions. And you guessed it - there are tons of people, all with different feelings and ideas. You're probably thinking "Geez, there's a lot of uncertainty in fundamental analysis! That's not saying that fundamental analysis should be dismissed.

Not at all. Because of the sheer volume of fundamental data available, most people simply have a hard time putting it all together. They understand a specific report, but can't factor it into the broader economic picture. This simply takes time and a deeper understanding of the data.

Also, since most fundamental data are reported only for a single currency, fundamental data for the other currency in the pair would also be needed and would then have to be compared to get an accurate picture. If you're too busy to go through a bajillion news reports and economic data, don't fret. Our resident economic guru, Forex Gump, got yo back covered!

Make sure you read up on his regular economic analysis on his Piponomics blog. As we mentioned from the get-go, it's all about pairing a strong currency with a weak one. At this point, you're probably still waiting for the answer to "Will I ever need to use fundamental analysis to become a successful trader? Technical analysis seems to be the preferred methodology of short-term traders, with price action as their main focus. Intermediate or medium traders and some long-term traders like to focus on fundamental analysis too because it helps with currency valuation.

We like to be a little crazy by saying you should use BOTH! Technically-focused strategies are blown to bits when a key fundamental event occurs. In the same respect, pure fundamental traders miss out on the short term opportunities that pattern formations and technical levels bring.

A mix of technical and fundamental analysis covers all angles. You're aware of the scheduled economic releases and events, but you can also identify and use the various technical tools and patterns that market players focus on. I have a couple of trade examples for you showing how the perfect blend of fundamental and technical analysis results in huge profits.

There's your answer! In this lesson, we'll discuss the major fundamental factors that affect currencies. These are interest rates, monetary policies, and market-moving economic reports. As I mentioned earlier, Pip Diddy's daily economic roundup is a great source of economic updates. Combine that with Forex Gump's in depth Piponomics articles and fundamental analysis will be a breeze! Interest Rates Simply put, interest rates make the forex world go 'round!

In other words, the forex market is ruled by interest rates. A currency's interest rate is probably the biggest factor in determining the perceived value of a currency. So knowing how a country's central bank sets its monetary policy, such as interest rate decisions, is a crucial thing to wrap your head around. One of the biggest influences on a central bank's interest rate decision is price stability, or "inflation".

Inflation is a steady increase in the prices of goods and services. Inflation is the reason why your parents or your parents' parents paid a nickel for a soda pop in the 's, but now people pay twenty times more for the same product.

It's generally accepted that moderate inflation comes with economic growth. However, too much inflation can harm an economy and that's why central banks are always keeping a watchful eye on inflation-related economic indicators, such as the CPI and PCE.

This occurs because setting high interest rates normally forces consumers and businesses to borrow less and save more, putting a damper on economic activity. Loans just become more expensive while sitting on cash becomes more attractive. On the other hand, when interest rates are decreasing, consumers and businesses are more inclined to borrow because banks ease lending requirements , boosting retail and capital spending, thus helping the economy to grow.

What does this have to do with the forex market? Well, currencies rely on interest rates because these dictate the flow of global capital into and out of a country. They're what investors use to determine if they'll invest in a country or go elsewhere.

Neither, you say? Yea, we're inclined to go the same route - keep the money under the mattress, ya know what we mean? We hope so because 1 is bigger than 0. Currencies work the same way! The higher a country's interest rate, the more likely its currency will strengthen. Currencies surrounded by lower interest rates are more likely to weaken over the longer term. Pretty simple stuff. The main point to be learned here is that domestic interest rates directly affect how global market players feel about a currency's value relative to another.

Interest rate expectations Markets are ever-changing with the anticipation of different events and situations. Interest rates do the same thing - they change - but they definitely don't change as often.

Most traders don't spend their time focused on current interest rates because the market has already "priced" them into the currency price.

What is more important is where interest rates are EXPECTED to go. It's also important to know that interest rates tend to shift in line with monetary policy, or more specifically, with the end of monetary cycles.

If rates have been going lower and lower over a period a time, it's almost inevitable that the opposite will happen. Rates will have to increase at some point.

And you can count on the speculators to try to figure out when that will happen and by how much. The market will tell them; it's the nature of the beast. A shift in expectations is a signal that a shift in speculation will start, gaining more momentum as the interest rate change nears. While interest rates change with the gradual shift of monetary policy, market sentiment can also change rather suddenly from just a single report. This causes interest rates to change in a more drastic fashion or even in the opposite direction as originally anticipated.

So you better watch out! Rate Differentials Pick a pair, any pair. Many forex traders use a technique of comparing one currency's interest rate to another currency's interest rate as the starting point for deciding whether a currency may weaken or strengthen. The difference between the two interest rates, known as the "interest rate differential," is the key value to keep an eye on.

This spread can help you identify shifts in currencies that might not be obvious. An interest rate differential that increases helps to reinforce the higher-yielding currency, while a narrowing differential is positive for the lower-yielding currency. Instances where the interest rates of the two countries move in opposite directions often produce some of the market's largest swing.

An interest rate increase in one currency combined with the interest rate decrease of the other currency is a perfect equation for sharp swings! Nominal vs. Real When people talk about interest rates, they are either referring to the nominal interest rate or the real interest rate.

What's the difference? The nominal interest rate doesn't always tell the entire story. The nominal interest rate is the rate of interest before adjustments for inflation. Markets, on the other hand, don't focus on this rate, but rather on the real interest rate.

That's a huge difference so always remember to distinguish between the two. Central banks and monetary policy go hand-in-hand, so you can't talk about one without talking about the other. While some of these mandates and goals are shared by the different central banks. Central banks have their own unique set of goals brought on by their distinctive economies. Ultimately, monetary policy boils down to promoting and maintaining price stability and economic growth. To achieve their goals, central banks use monetary policy mainly to control the following:  the interest rates tied to the cost of money,  the rise in inflation,  the money supply,  reserve requirements over banks,  and discount window lending to commercial banks Types of Monetary Policy Monetary policy can be referred to in a couple different ways.

Contractionary or restrictive monetary policy takes place if it reduces the size of the money supply. It can also occur with the raising of interest rates. The idea here is to slow economic growth with the high interest rates.

Borrowing money becomes harder and more expensive, which reduces spending and investment by both consumers and businesses. Expansionary monetary policy, on the other hand, expands or increases the money supply, or decreases the interest rate. The cost of borrowing money goes down in hopes that spending and investment will go up. Accommodative monetary policy aims to create economic growth by lowering the interest rate, whereas tight monetary policy is set to reduce inflation or restrain economic growth by raising interest rates.

Finally, neutral monetary policy intends to neither create growth nor fight inflation. They might not come out and say it specifically, but their monetary policies all operate and focus on reaching this comfort zone. They know that some inflation is a good thing, but out-of-control inflation can remove the confidence people have in their economy, their job, and ultimately, their money.

By having target inflation levels, central banks help market participants better understand how they the central bankers will deal with the current economic landscape. Let's take a look at an example. Back in January of , inflation in the U. shot up to 3. Mervyn King, the governor of the BOE, followed up the report by reassuring people that temporary factors caused the sudden jump, and that the current inflation rate would fall in the near term with minimal action from the BOE.

Whether or not his statements turned out to be true is not the point here. We just want to show that the market is in a better place when it knows why the central bank does or doesn't do something in relation to its target interest rate. Simply put, traders like stability. Central banks like stability. Economies like stability.

Knowing that inflation targets exist will help a trader to understand why a central bank does what it does. Round and Round with Policy Cycles For those of you that follow the U. dollar and economy and that should be all of you! It was the craziest thing to come out of the Fed ever, and the financial world was in an uproar! Wait, you don't remember this happening? It was all over the media.

Petroleum prices went through the roof and milk was priced like gold. You must have been sleeping! Oh wait, we were just pulling your leg! We just wanted to make sure you were still awake. Monetary policy would never dramatically change like that. Most policy changes are made in small, incremental adjustments because the bigwigs at the central banks would have utter chaos on their hands if interest rates changed too radically.

Just the idea of something like happening would disrupt not only the individual trader, but the economy as a whole. That's why we normally see interest rate changes of. Again, remember that central banks want price stability, not shock and awe.

Part of this stability comes with the amount of time needed to make these interest rate changes happen. It can take several months to even several years. Just like traders who collect and study data to make their next move, central bankers do a similar job, but they have to focus their decision-making with the entire economy in mind, not just a single trade. Interest rate hikes can be like stepping on the accelerator while interest rate cuts can be like hitting the brakes, but bear in mind that consumers and business react a little more slowly to these changes.

This lag time between the change in monetary policy and the actual effect on the economy can take one to two years. The Who's Who of the Central Bank We just learned that currency prices are affected a great deal by changes in a country's interest rates. We now know that interest rates are ultimately affected by a central bank's view on the economy and price stability, which influence monetary policy.

Central banks operate like most other businesses in that they have a leader, a president or a chairman. It's that individual's role to be the voice of that central bank, conveying to the market which direction monetary policy is headed. And much like when Steve Jobs or Michael Dell steps to the microphone, everyone listens.

Using the Complex conjugate root theorem, the answer is yes! Yes, it's important to know what's coming down the road regarding potential monetary policy changes. And lucky for you, central banks are getting better at communicating with the market.

Whether you actually understand what they're saying, well that's a different story. So the next time Ben Bernanke or Jean-Claude Trichet are giving speeches, keep your ears open. Better yet, use the trusty BabyPips. com Economic Calendar to prepare yourself before the actual speech. While the central bank Chairman isn't the only one making monetary policy decisions for a country or economy, what he or she has to say is only not ignored, but revered like the gospel.

Okay, maybe that was a bit dramatic, but you get the point. Not all central bank officials carry the same weight. Central bank speeches have a way of inciting a market response, so watch for quick movement following an announcement. Speeches can include anything from changes increases, decreases or holds to current interest rates, to discussions about economic growth measurements and outlook, to monetary policy announcements outlining current and future changes.

But don't despair if you can't tune in to the live event. As soon as the speech or announcement hits the airwaves, news agencies from all over make the information available to the public.

Currency analysts and traders alike take the news and try to dissect the overall tone and language of the announcement, taking special care to do this when interest rate changes or economic growth information are involved. Much like how the market reacts to the release of other economic reports or indicators, currency traders react more to central bank activity and interest rate changes when they don't fall in line with current market expectation.

It's getting easier to foresee how a monetary policy will develop over time, due to an increasing transparency by central banks. Yet there's always a possibility that central bankers will change their outlook in greater or lesser magnitude than expected.

It's during these times that marketing volatility is high and care should be taken with existing and new trade positions. Los Angeles Hawks vs. the New York Doves Yes, you're in the right place. Tonight's match puts the L. Hawks up against the N. You're in for a treat. Wait, what?! Whoops sorry, wrong subject. We really just meant hawks versus doves, central bank hawks versus central bank doves that is. Central bankers can be viewed as either hawkish or dovish, depending on how they approach certain economic situations.

Central bankers are described as "hawkish" when they are in support of the raising of interest rates to fight inflation, even to the detriment of economic growth and employment. For example, "The Bank of England suggests the existence of a threat of high inflation. Dovish central bankers, on the other hand, generally favor economic growth and employment over tightening interest rates.

They also tend to have a more non-aggressive stance or viewpoint regarding a specific economic event or action. And the winner is It's a tie!

Well, sort of. You'll find many a banker "on the fence", exhibiting both hawkish and dovish tendencies. However, true colors tend to shine when extreme market conditions occur. Long-term Market Movers There are several fundamentals that help shape the long term strength or weakness of the major currencies. We've included what we think are the most important, for your reading pleasure: Economic Growth and Outlook We start easy with the economy and outlook held by consumers, businesses and the governments.

It's easy to understand that when consumers perceive a strong economy, they feel happy and safe, and they spend money. Companies willingly take this money and say, "Hey, we're making money! uh, what do we do with all this money? And all this creates some healthy tax revenue for the government. They jump on board and also start spending money. Now everybody is spending, and this tends to have a positive effect on the economy.

But you get the idea. Both positive and negative economic outlooks can have a direct effect on the currency markets. Capital Flows Globalization, technology advances and the internet have all contributed to the ease of investing your money virtually anywhere in the world, regardless of where you call home.

You're only a few clicks of the mouse away or a phone call for you folks living in the Jurassic era of the 's from investing in the New York or London Stock exchange, trading the Nikkei or Hang Seng index, or from opening a forex account to trade U.

dollars, euros, yen, and even exotic currencies. Capital flows measure the amount of money flowing into and out of a country or economy because of capital investment purchasing and selling.

The important thing you want to keep track of is capital flow balance, which can be positive or negative. When a country has a positive capital flow balance, foreign investments coming into the country are greater than investments heading out of the country.

A negative capital flow balance is the direct opposite. Investments leaving the country for some foreign destination are greater than investments coming in. With more investment coming into a country, demand increases for that country's currency as foreign investors have to sell their currency in order to buy the local currency. This demand causes the currency to increase in value. Simple supply and demand. And you guessed it, if supply is high for a currency or demand is weak , the currency tends to lose value.

When foreign investments make an about-face, and domestic investors also wants to switch teams and leave, and then you have an abundance of the local currency as everybody is selling and buying the currency of whatever foreign country or economy they're investing in.

Foreign capital love nothing more than a country with high interest rates and strong economic growth. If a country also has a growing domestic financial market, even better! A booming stock market, high interest rates What's not to love?!

Foreign investment comes streaming in. And again, as demand for the local currency increases, so does its value. Countries sell their own goods to countries that want them exporting , while at the same time buying goods they want from other countries importing. Have a look around your house. Most of the stuff electronics, clothing, doggie toys lying around are probably made outside of the country you live in. Every time you buy something, you have to give up some of your hard-earned cash.

Whoever you buy your widget from has to do the same thing. importers exchange money with Chinese exporters when they buy goods. And Chinese imports exchange money with European exporters when they buy goods. All this buying and selling is accompanied by the exchange of money, which in turn changes the flow of currency into and out of a country. Trade balance or balance of trade or net exports measures the ratio of exports to imports for a given economy. It demonstrates the demand of that country's good and services, and ultimately it's currency as well.

If exports are higher than imports, a trade surplus exists and the trade balance is positive. If imports are higher than exports, a trade deficit exists, and the trade balance is negative.

Net importers first have to sell their currency in order to buy the currency of the foreign merchant who's selling the goods they want. When there's a trade deficit, the local currency is being sold to buy foreign goods. Because of that, the currency of a country with a trade deficit is less in demand compared to the currency of a country with a trade surplus.

Net exporters, countries that export more than they import, see their currency being bought more by countries interested in buying the exported goods. It's all due to the demand of the currency. Currencies in higher demand tend to be valued higher than those in less demand.

It's similar to pop stars. Because she's more in demand, Lady Gaga gets paid more than Britney Spears. Same thing with Justin Bieber versus Vanilla Ice. The Government: Present and Future The years and have definitely been the years where more eyes were glaringly watching their respective country's governments, wondering about the financial difficulties being faced, and hoping for some sort of fiscal responsibility that would end the woes felt in our wallets.

Instability in the current government or changes to the current administration can have a direct bearing on that country's economy and even neighboring nations. And any impact to an economy will most likely affect exchange rates.

That's right! No wonder you're here to get some education! There's just way too much information to try to process and way too many things to confuse any newbie trader. That's some insane information overload if we've ever seen it. But information is king when it comes to making successful trades. Price moves because of all of this information: economic reports, a new central bank chairperson, and interest rate changes.

News moves fundamentals and fundamentals move currency pairs! It's your goal to make successful trades and that becomes a lot easier when you know why price is moving that way it is. Successful traders weren't born successful; they were taught or they learned. Successful traders don't have mystical powers well, except for Pipcrawler, but he's more weird than he is mystical and they can't see the future.

What they can do is see through the blur that is forex news and data, pick what's important to traders at the moment, and make the right trading decisions. Where to Go for Market Information Market news and data is made available to you through a multitude of sources.

The internet is the obvious winner in our book, as it provides a wealth of options, at the speed of light, directly to your screen, with access from almost anywhere in the world. But don't forget about print media and the good old tube sitting in your living room or kitchen. Individual traders will be amazed at the sheer number of currency-specific websites, services, and TV programming available to them. Most of them are free of charge, while you may have to pay for some of the others. Let's go over our favorites to help you get started.

Websites Our top pick of a forex news-specific website is FreshPips. Make a mental note that the name of the website is eerily similar to the one you're currently on. Oh wait, FreshPips. com is just another apple out of the basket of "Pips. com" websites see all of them here.

We're not ashamed about promoting FreshPips. Put on this planet to help you unearth and share interesting and useful forex news and research, handpicked from the web by forex traders, from the biggest news sites to little known blogs, FreshPips. com reveals the finest materials as voted on by our users to help you become a smarter forex trader. It covers the areas of analysis, commentary, economic indicators, psychology, and specific currencies. Traditional Financial News Sources While there are tons of financial news resources out there, we advise you to stick with the big names.

These guys provide around-the-clock coverage of the markets, with daily updates on the big news that you need to be aware of, such as central bank announcements, economic report releases and analysis, etc. Many of these big players also have institutional contacts that provide explanations about the current events of the day to the viewing public.

Financial TV networks exist 24 hours a day, seven days a week to provide you up-to-the-minute action on all of the world's financial markets. In the U. You could even throw a little BBC in there. Another option for real-time data comes from your trading platform. Many brokers include live newsfeeds directly in their software to give you easy and immediate access to events and news of the currency market. Check your broker for availability of such features not all brokers features are created equally.

It's all possible with an economic calendar. The good ones let you look at different months and years, let you sort by currency, and let you assign your local time zone. Yes, economic events and data reports take place more frequently than most people can keep up with.

This data has the potential to move markets in the short term and accelerate the movement of currency pairs you might be watching. Lucky for you, most economic news that's important to forex traders is scheduled several months in advance. So which calendar do we recommend? We look no further than our very own BabyPips. com forex Economic Calendar to provide all that goodness! If you don't like ours which we highly doubt , a simple Yahoogleing search will offer up a nice collection for you to examine.

Market Information Tips Keep in mind the timeliness of the reports you read. A lot of this stuff has already occurred and the market has already adjusted prices to take the report into account. If the market has already made its move, you might have to adjust your thinking and current strategy. Keep tabs on just how old this news is or you'll find yourself "yesterday's news.

Economic data rumors do exist, and they can occur minutes to several hours before a scheduled release of data. The rumors help to produce some short-term trader action, and they can sometimes also have a lasting effect on market sentiment.

Institutional traders are also often rumored to be behind large moves, but it's hard to know the truth with a decentralized market like spot forex. There's never a simple way of verifying the truth. Your job as a trader is to create a good trading plan and quickly react to such news about rumors, after they've been proven true or false. Having a well-rounded risk management plan in this case could save you some moolah! And the final tip: Know who is reporting the news. Are we talking analysts or economists, economist or the owner of the newest forex blog on the block?

Maybe a central bank analyst? The more reading and watching you do of forex news and media, the more finance and currency professionals you'll be exposed to.

Are they offering merely an opinion or a stated fact based on recently released data? The more you know about the "Who", the better off you will be in understanding how accurate the news is. Those who report the news often have their own agenda and have their own strengths and weaknesses.

Get to know the people that "know", so YOU "know". Can you dig it? Market Reaction There's no one "All in" or "Bet the Farm" formula for success when it comes to predicting how the market will react to data reports or market events or even why it reacts the way it does. You can draw on the fact that there's usually an initial response, which is usually short-lived, but full of action. Later on comes the second reaction, where traders have had some time to reflect on the implications of the news or report on the current market.

It's at this point when the market decides if the news release went along with or against the existing expectation, and if it reacted accordingly. Was the outcome of the report expected or not? And what does the initial response of the market tell us about the bigger picture? Answering those questions gives us place to start interpreting the ensuing price action. Consensus Expectations A consensus expectation, or just consensus, is the relative agreement on upcoming economic or news forecasts.

Economic forecasts are made by various leading economists from banks, financial institutions and other securities related entities. Your favorite news personality gets into the mix by surveying her in-house economist and collection of financial sound "players" in the market.

All the forecasts get pooled together and averaged out, and it's these averages that appear on charts and calendars designating the level of expectation for that report or event.

The consensus becomes ground zero; the incoming, or actual data is compared against this baseline number. Incoming data normally gets identified in the following manner:  "As expected" - the reported data was close to or at the consensus forecast. Whether or not incoming data meets consensus is an important evaluation for determining price action.

Just as important is the determination of how much better or worse the actual data is to the consensus forecast. Larger degrees of inaccuracy increase the chance and extent to which the price may change once the report is out.

However, let's remember that forex traders are smart, and can be ahead of the curve. Well the good ones, anyway. Many currency traders have already "priced in" consensus expectations into their trading and into the market well before the report is scheduled, let alone released.

As the name implies, pricing in refers to traders having a view on the outcome of an event and placing bets on it before the news comes out. The more likely a report is to shift the price, the sooner traders will price in consensus expectations. How can you tell if this is the case with the current market? Well, that's a tough one. You can't always tell, so you have to take it upon yourself to stay on top of what the market commentary is saying and what price action is doing before a report gets released.

This will give you an idea as to how much the market has priced in. A lot can happen before a report is released, so keep your eyes and ears peeled. Market sentiment can improve or get worse just before a release, so be aware that price can react with or against the trend.

There is always the possibility that a data report totally misses expectations, so don't bet the farm away on the expectations of others. When the miss occurs, you'll be sure to see price movement occur. Help yourself out for such an event by anticipating it and other possible outcomes to happen. Play the "what if" game. Ask yourself, "What if A happens? What if B happens? How will traders react or change their bets? What if the report comes in under expectation by half a percent?

How many pips down will price move? What would need to happen with this report that could cause a 40 pip drop? Come up with your different scenarios and be prepared to react to the market's reaction. Being proactive in this manner will keep you ahead of the game. What the Deuce? They Revised the Data? Now what? Too many questions in that title.

But that's right, economic data can and will get revised. That's just how economic reports roll! Let's take the monthly Non-Farm Payroll employment numbers NFP as an example. As stated, this report comes out monthly, usually included with it are revisions of the previous month's numbers. We'll assume that the U. economy is in a slump and January's NFP figure decreases by 50,, which is the number of jobs lost. It's now February, and NFP is expected to decrease by another 35, But the incoming NFP actually decreases by only 12,, which is totally unexpected.

Also, January's revised data, which appears in the February report, was revised upwards to show only a 20, decrease. As a trader you have to be aware of situations like this when data is revised.

Not having known that January data was revised, you might have a negative reaction to an additional 12, jobs lost in February. That's still two months of decreases in employment, which ain't good. However, taking into account the upwardly revised NFP figure for January and the better than expected February NFP reading, the market might see the start of a turning point.

The state of employment now looks totally different when you look at incoming data AND last month's revised data. Be sure not only to determine if revised data exists, but also note the scale of the revision. Bigger revisions carry more weight when analyzing the current data releases.

Revisions can help to affirm a possibly trend change or no change at all, so be aware of what's been released. Market Sentiment The market has feelings too, you know. Get ready to learn all about market sentiment! Lessons in Market Sentiment 1. What is Market Sentiment Every trader has his own opinion about the market. The combined feeling that market participants have, that's what you call market sentiment, young Padawan.

Commitment of Traders Report Gauging market sentiment may not be as difficult as you think. The Commitment of Traders COT report can be a clue on whether the market is bearish or bullish.

How do you get a hold of the COT report? It's as easy as , baby! Understanding the Three Groups Meet the different playas in the futures trading field: hedgers, large speculators, and small speculators! The COT Trading Strategy Yeah, we know. The COT report looks like a giant gobbled-up block of text.

But don't fret! There's actually a pretty simple way to use it. Picking Tops and Bottoms When the market sentiment shifts, should you go with the speculators or the hedgers? Your Very Own COT Indicator Studying the School of Pipsology is about to get sweeter! Are you ready to create your very own COT indicator? Getting Down and Dirty with the Numbers Put your thinking caps on because we're gonna get down and dirty with the numbers to calculate for the percentage of speculative positions!

What is Market Sentiment How's Mr. Market Feeling? Every trader will always have an opinion about the market. I'm pretty bullish on the markets right now. When trading, traders express this view in whatever trade he takes.

But sometimes, no matter how convinced a trader is that the markets will move in a particular direction, and no matter how pretty all the trend lines line up, the trader may still end up losing. A trader must realize that the overall market is a combination of all the views, ideas and opinions of all the participants in the market. That's right This combined feeling that market participants have is what we call market sentiment.

It is the dominating emotion or idea that the majority of the market feels best explains the current direction of the market. How to Develop a Sentiment-Based Approach As a trader, it is your job to gauge what the market is feeling. Are the indicators pointing towards bullish conditions? Are traders bearish on the economy? We can't tell the market what we think it should do.

But what we can do is react in response to what is happening in the markets. Note that using the market sentiment approach doesn't give a precise entry and exit for each trade. But don't despair! Having a sentiment-based approach can help you decide whether you should go with the flow or not. Of course, you can always combine market sentiment analysis with technical and fundamental analysis to come up with better trade ideas.

In stocks and options, traders can look at volume traded as an indicator of sentiment. If a stock price has been rising, but volume is declining, it may signal that the market is overbought. Or if a declining stock suddenly reversed on high volume, it means the market sentiment may have changed from bearish to bullish. Unfortunately, since the foreign exchange market is traded over-the-counter, it doesn't have a centralized market.

This means that the volume of each currency traded cannot be easily measured. OH NOOOO!!!! Without any tools to measure volume, how can a trader measure market sentiment?! This is where the Commitment of Traders report comes in! Commitment of Traders Report The COT Report: What, Where, When, Why, and How The Commodity Futures Trading Commission, or CFTC, publishes the Commitment of Traders report COT every Friday, around pm EST.

Because the COT measures the net long and short positions taken by speculative traders and commercial traders, it is a great resource to gauge how heavily these market players are positioned in the market.

Later on, we'll let you meet these market players. These are the hedgers, large speculators, and retail traders. Just like players in a team sport, each group has its unique characteristics and roles. By watching the behavior of these players, you'll be able to foresee incoming changes in market sentiment. You're probably asking yourself, "Why the heck do I need to use data from the FX futures market?

Activity in the futures market doesn't involve me. So what's the closest thing we can get our hands on to see the state of the market and how the big players are moving their money? Yep, you got it The Commitment of Traders report from the futures market. Before going into using the Commitment of Traders report in your trading strategy, you have to first know WHERE to go to get the COT report and HOW to read it. htm Step 2: Once the page has loaded, scroll down a couple of pages to the "Current Legacy Report" and click on "Short Format" under "Futures Only" on the "Chicago Mercantile Exchange" row to access the most recent COT report.

Step 3: It may seem a little intimidating at first because it looks like a big giant gobbled-up block of text but with a little bit of effort, you can find exactly what you're looking for. To find the British Pound Sterling, or GBP, for example, just search up "Pound Sterling" and you'll be taken directly to a section that looks something like this: Yowza!

What the heck is this?! We'll explain each category below. For the most part, these are traders who looking to trade for speculative gains. In other words, these are traders just like you who are in it for the Benjamins! If you want to access all available historical data, you can view it here. You can see a lot of things in the report but you don't have to memorize all of it. As a budding trader, you'll only be focusing on answering the basic question: "Wat da dilly on da market yo?!

These players could be categorized into three basic groups: 1. Commercial traders Hedgers 2. Non-commercial traders Large Speculators 3. Retail traders Small Speculators Don't Skip the Commercial - The Hedgers Hedgers or commercial traders are those who want to protect themselves against unexpected price movements.

Agricultural producers or farmers who want to hedge minimize their risk in changing commodity prices are part of this group. Banks or corporations who are looking to protect themselves against sudden price changes in currencies or other assets are also considered commercial traders.

A key characteristic of hedgers is that they are most bullish at market bottoms and most bearish at market tops. What the hedgehog does this mean? Here's a real life example to illustrate: There is a virus outbreak in the U. that turns people into zombies.

Zombies run amok doing malicious things like grabbing strangers' iPhones to download fart apps. It's total mayhem as people become disoriented and helpless without their beloved iPhones. This must be stopped now before the nation crumbles into oblivion! Guns and bullets apparently don't work on the zombies. The only way to exterminate them is by chopping their heads off.

Apple sees a "market need" and decides to build a private Samurai army to protect vulnerable iPhone users. It needs to import samurai swords from Japan.

Steve Jobs contacts a Japanese samurai swordsmith who demands to be paid in Japanese yen when he finishes the swords after three months. In order to protect itself, or rather, hedge against currency risk, the firm buys JPY futures. In It to Win It - The Large Speculators In contrast to hedgers, who are not interested in making profits from trading activities, speculators are in it for the money and have no interest in owning the underlying asset!

Many speculators are known as hardcore trend followers since they buy when the market is on an uptrend and sell when the market is on a downtrend. They keep adding to their position until the price movement reverses. Large speculators are also big players in the futures market since they hold huge accounts.

As a result, their trading activities can cause the market to move dramatically. They usually follow moving averages and hold their positions until the trend changes. Cannon fodders - The Small Speculators Small speculators, on the other hand, own smaller retail accounts.

These comprise of hedge funds and individual traders. They are known to be anti-trend and are usually on the wrong side of the market. Because of that, they are typically less successful than hedgers and commercial traders. However, when they do follow the trend, they tend to be highly concentrated at market tops or bottoms. The COT Trading Strategy Since the COT comes out weekly, its usefulness as a market sentiment indicator would be more suitable for longer-term trades.

The question you may be asking now is this: How the heck do you turn all that "big giant gobbled-up block of text" into a sentiment-based indicator that will help you grab some pips?! One way to use the COT report in your trading is to find extreme net long or net short positions. Finding these positions may signal that a market reversal is just around the corner because if everyone is long a currency, who is left to buy? No one. And if everyone is short a currency, who is left to sell?

What's that? Pretty quiet Yeah, that's right. NO ONE. One analogy to keep in mind is to imagine driving down a road and hitting a dead end. What happens if you hit that dead end? You can't keep going since there's no more road ahead. The only thing to do is to turn back.

At the same time, on the bottom half, we've got data on the long and short positions of EUR futures, divided into three categories:  Commercial traders blue  Large Non-commercial green  Small non-commercial red Ignore the commercial positions for now, since those are mainly for hedging while small retail traders aren't relevant. For sell setup, its the exact opposite. If you use the 5 minute or the 15 minute timeframe to trade the news this way, you can use buy stop or sell stop pending order.

Hello Traders, The 1 minute forex news trading strategy is another strategy where you can use to trade currency news. For example, the Reserve bank of Australia announces an interest rate increase from 3 to 3. Where to get the forex news and dates they are scheduled to be released? Over at forexfactory. TRADING RULES Head over to forexfactory. com and see what time the news is scheduled to be released. A few seconds after the news is released, refresh the forexfactory page so that you will see the figure s of the news.

if the news is good for the base currency, price will shoot up, if its bad, price will fall down. switch to the 1 minute timeframe if you are using that and watch the candlesticks highs or lows.

For A Buy setup, if the news is good and currency shoots up, you will see the 1 minute candlesticks making new highs and higher low. Then price will start to reverse and what you will see is that the highs will be lower and the lows will be lower than the previous candlesticks.

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Our Forex trading PDF, it is widely believed that forex is one of the biggest and most fluid or liquid asset markets in the world. Sometimes referred to as FX, currencies are traded 24 hours per day — 7 days per week. In simple terms, refers to the process of exchanging one currency to another — and generally speaking, this will be for tourism, commerce, trading and many other reasons.

In this forex trading PDF we are going to talk about what forex trading is and some of the commonly used terminology in the industry. Essentially, it is the action of selling or buying foreign currencies. Of course, these are all used by banks, corporations and investors for a variety of reasons like profit, making a trade, exchanging foreign currencies and tourism.

One of the major benefits with forex trading is that after opening a position, traders are able to put in place an automatic stop loss as well as at profit levels this closes the trade. The forex market is a place to buy or sell against each other a variety of national currencies, globally. Wherever two foreign currencies are being traded, you can be sure that a forex market exists regardless of the time zone. In this section of our forex trading PDF, we are going to run through some of the most commonly used forex trading terminologies in the industry.

The pip represents the smallest amount possible a currency quote can alter. For instance, 0. The differentiation between the sale price and the purchase price of a currency pair is known as the spread.

The least popular least commonly used currency pairs usually have a low spread. In some cases, this can be even less than a pip. When trading the most commonly used currency pairs the spread is often at its lowest. The total value of the currency pair needs to surpass the spread in order for the forex trade to become profitable.

In order for forex brokers to increase the number of trades available to its customers, they need to provide capital in the way of leverage. Before you can trade using leverage, you must sign up to a forex broker and open a margin account. Contingent on the broker and the size of the position, leverage is usually capped at if you are a retail client non-professional trader. Some offshore forex brokers will offer much more than this if you are seeking higher limits.

It is because of the aforementioned example that you should exercise caution when using leverage. Should the worst possible scenario happen and your account falls below 0, you should contact your forex broker and ask for its policy on negative balance protection.

The good news is that all forex brokers which are regulated by ESMA the European Securities and Markets Authority will be able to provide you with this extra level of protection, ensuring that you never become in debt with your broker. Margins are a good way for traders to build up their exposure. Put simply, in order for a trader to maintain position and place a trade, the trader needs to put forward a specific amount of money first — this is the margin.

Rather than being a transaction cost, the margin can be compared to a security deposit. This will be held by the broker during an open forex trade. It is commonplace for forex brokers to give their customers access to leverage see above. In order for you to lower your risk of exposure and offset your balance, you might consider hedging.

This is a procedure which involves traders selling and buying financial instruments. When there are movements in currencies, a hedging strategy can reduce the risk of disadvantageous price shifts.

The protection of this technique is often a short term solution. Traders often turn to hedge in a panic as a result of the financial media reporting volatility in currency markets.

This is usually down to huge events like geopolitical turmoil conflict in the middle east , global health crisis COVID and of course the great financial crisis of To counteract negative price movements, market players will tactically take advantage of attainable financial instruments in the market. This is hedging against risk in its truest form.

Hedging will give you some flexibility when it comes to enhancing your forex trading experience, but there are still no guarantees that you will be totally protected from any losses or risks. While it can take some time to get your head around heading in the forex markets, the overarching concept is that it presents both outcomes.

That is to say, irrespective of which way the markets move, you will remain at the break-even point less some trading commissions. More specifically, the spot trade is a spot transaction, with reference to the sale or the purchase of a currency. Essentially, spot forex is to both sell and buy foreign currencies. A good example of this is if you were to purchase a certain amount of South African rands ZAR , and exchange that for US dollars USD.

If the value of the ZAR increases, you are able to exchange your USD back to ZAR, meaning you get more money back in comparison to the amount you originally paid. CFD is basically a contract which portrays the price movement of financial instruments. So, without having to own the asset, you can still make the most of price movements, whilst also avoiding the need to sell or buy vast amounts of currency.

CFDs are also accessible in bonds, commodities , cryptocurrencies, stocks, indices and of course — forex. With a CFD you are able to trade in price movements, cutting out the need to buy them at all. This section of our forex trading PDF is all about forex charts.

When it comes to a MetaTrader platform, traders can use bar charts, line charts and candlestick charts. You can usually toggle between the different charts, depending on your preferences, fairly easily. The first record of the now-famous candlestick chart was used in Japan during the s and proved invaluable for rice traders.

These days, this price chart is without a doubt one the most popular amongst traders all over the world. Much like the OHLC bar chart see below , candlestick charts provide low, high, open and close values for a predetermined time frame. Live forex traders love this chart due to its visual appearance and the range of price action patterns utilised.

This allows you to gain a better understanding of how live trading works before you take any big financial risks in the market. As the title suggests, this one is a bar chart, and each time frame a trader is looking at will be displayed as a bar. In other words, if you are viewing a daily chart you will see that every bar equates to a full trading day.

With this price chart, traders are able to establish who is controlling the market, whether it be sellers or buyers. OHLC analysis was the starting block for the creation of the ever-popular candlestick charts please further down. It is a great tool for looking at the bigger picture when it comes to trends.

The line chart arranges the close prices at the end of that time frame; so in this case, at the end of the day, the line will connect the closing price of that day. In this section of our forex trading PDF, we are going to talk about the different ways in which you can sell and buy a forex position as well as things to look out for. When it comes to forex trading you can trade both short and long, but always make sure you have a good understanding of forex trading before embarking on trades.

After all, forex trading can be a bit complex to begin with, especially when mixing long and short trades. In a nutshell, going long is usually a term used for buying. So, when traders expect the price of an asset to rise, they will go long. When forex traders expect the price of an asset to fall, they will go short. This means benefiting from buying at a lesser value.

To achieve this, you simply need to place a sell order. The current exchange rate of a forex pair is always based on market forces. This will change on a second-by-second basis. As we noted earlier, you also need to take the spread into account, so there will always be a slight variation in pricing.

For instance, if you exchange 1 USD for 17 ZAR, the sale and purchase price offered by your forex broker will be either side of that figure.

The currency pairs with the most notable supply and demand attached to them will be considered the most liquid in the forex market. The supply and demand aspect is thanks to the investment of importers, exporters, banks and traders — to name a few. The most liquid currency pairs are therefore the ones in high demand.

When you feel you are ready to take the plunge and begin live trading, you need to select a forex trading system. There is a vast amount of trading strategies for you to pick from. This is because investors, speculators, corporations and banks have been trading for decades. In this part of the forex trading PDF, we are going to explain a few of the strategies available to you. If you want to buy and sell currency pairs from the comfort of your home or even via your mobile device , you will need to use a trading platform.

Otherwise referred to as a forex broker, there are literally hundreds of trading platforms active in the online space. This makes it extremely difficult to know which broker to sign up with. In the below sections of our forex trading PDF, we explain some of the considerations that you need to make. You should also look out for analysis tools available to you.

In some cases, this might be embedded, while some offer tools such as technical analysis and fundamental analysis. This is because it will save you a lot of leg work having to move between different sites and sources of information. Some of the fastest and easiest trading platforms are MetaTrader 5 MT5 and MetaTrader 4 MT4. Crucially, both MT4 and MT5 are fast and receptive trading platforms, both providing live market data and access to sophisticated charts. It is essential before you begin trading seriously that you fully trust the trading platform you intend on using.

This is especially the case if you intend on using a scalping strategy, for example. However, if you like to trade, it is vital for your peace of mind and your finances that you are fully confident with the fast execution of data transfer. This is also the case with the precision of quoted prices, and the speed of order processing. All of these things are going to help you to have a successful forex trading experience. To enable you to make the most of new opportunities, the ideal forex broker will be available to you 24 hours a day and 7 days a week, in line with the forex market opening hours.

To save you from having to request that your broker takes action for you, your forex broker should enable you to manage your account and your trades separately.

An underlying philoso- phy of this book is that successful forex trading requires a total approach that integrates fundamentals, technical analysis, and psychology. In this section of our forex trading PDF, we are going to talk about the different ways in which you can sell and buy a forex position as well as things to look out for. Any surprise news that is positive for the yen can just mean to be prepared for a reversal toward strengthening. Revisions can help to affirm a possibly trend change or no change at all, so be aware of what's been released. Darren Chia. The consumer price index CPI is the change in the price of a basket of goods and services. Lessons in Trading the News 1.

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