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    The Impact Of Economic News On Forex Trading

    Economic news releases can have a significant impact on the forex market. They can move prices in both directions, depending on what the data shows. For traders, it’s important to be aware of these releases and how they might affect the currency pairs you’re watching. In this post, we’ll take a look at how economic news releases can move the forex market and how important it is to stay updated. 

    The Release Of Economic News Creates Volatility In The Forex Market

    News releases are a potent source of volatility in foreign exchange markets, serving as a major consideration for traders. These key pieces of information can make or break the financial trajectories for investors, depending on their opening positions relative to the new insights. The relationship between news and market volatility can provide substantial benefits when successfully navigated. However, failure to take timely action could result in a significant loss, but this could be avoided by exercising caution about current events. As such, traders must stay abreast of any relevant fiscal developments if they are to remain competitive in the rapidly changing forex market.

    A Significant Impact Of Economic News On Currency Prices

    Economic news is a key component of forex trading whether it pertains to economic indicators, central bank announcements, or economic forecasts. Economic news can have a major impact on currency prices. If it is an unexpected or opposite-of-expected outcome, the effect can be particularly pronounced. Currency speculators must always remain aware of economic news and be prepared to respond quickly to take advantage of potential price fluctuations. Economic news often leads to high volatility. Traders must exercise great caution when making decisions timed with economic events.

    Importance Of Economic News Awareness In Developing A Trading Plan. 

    Forex trading is one of the most dynamic markets in the world, and a major part of success lies in staying informed about upcoming economic releases. Having an awareness of these announcements can be essential in determining when to enter and exit the market, as well as for setting profit and loss goals. However, it is equally important to have a plan for how you will trade if there is a big move in the forex price due to an announcement or some other shock to the forex market. An effective forex strategy should allow you to take advantage of news-based movements while managing risk appropriately so that losses are kept to a minimum. Being aware of economic releases and having a well-thought-out plan can give forex traders an added edge.

     

    The release of economic news is one of the most important factors that can impact the forex market. Economic news can have a significant impact on currency prices, especially if the news is unexpected or contrary to market expectations. News releases can cause volatility in the forex market, which can be either good or bad for traders depending on their positions. It is important to be aware of upcoming economic releases and to have a plan for how you will trade if there is a big move in the market. Stay updated! 

     

    Trade Bull or Bear in the Forex Markets

    Effective long and medium-term trading strategies in all markets typically involve identifying the major underlying trend and then trading with the trend’s overall direction.

    This tends to hold true regardless of whether the trend consists of an upward trend or bull market, or a downward trend that is otherwise known as a bear market.

    Bear Markets and Stock Trading Regulations

    Because of the regulation which many traders consider to be excessive, stock traders are often limited in their ability to take short positions in stocks. This can significantly affect the scope of their trading opportunities, especially in bear markets.

    The reason for these numerous rule changes involves the stock market’s various crashes which have occurred historically. These regulations have the overall effect of making the shorting of stocks increasingly difficult in declining markets.

    Basically, traders are only permitted to short a stock on an uptick in its price. This so-called short sale rule has even been expanded recently to prohibit the shorting of financial stocks altogether when the market has declined by a certain percentage.

    In addition, because of the fact that currencies trade in pairs, all currencies cannot decline simultaneously in the forex market. This differs from stocks, which can all move down simultaneously in a typical bear market crash scenario. This is the primary reason that the short selling regulations were instituted in the first place.

    Trade Bear Markets in Forex Easily

    Unlike the stock market, the forex market is comparatively unregulated. This allows traders to sell short regardless of the direction of the last sale, which is how this regulation works in the stock market. In essence, the forex market allows traders to go short any currency pair as long as a bid price can be found in the amount they wish to deal.

    Because of the lack of restrictions in the forex market, bull and bear markets remain equally easy to trade. Also, because of its unregulated nature, moves in the forex market are usually dictated by the levels of supply and demand in the market, although at times central banks may intervene to stabilize their currency.

    Basically, the forex market allows traders a more equitable and efficient marketplace in which to operate. This makes trading just as easy in a bear market as in a bull market.

    The U.S. Dollar’s Trend Creates Bull and Bear Forex Markets

    In the stock market, individual stocks will tend to trend according to the company’s prospects and for the market generally.

    Nevertheless, stocks which perform poorly will still rise in a bull market, while high performing stocks with strong earnings will still decline in a bull market, although perhaps to a lesser degree than the overall market.

    The rough equivalent of the overall stock market for forex traders is the performance of the U.S. Dollar. Because of the Dollar’s status as the world’s premier reserve currency since the end of the Second World War, the majority of large moves seen in the forex market will either be in favor of or against the U.S. Dollar.

    Basically, since the U.S. Dollar often plays the role of market leader, its value will rise and fall against a number of other currencies simultaneously depending on economic conditions in the United States in relation to the rest of the world.

    This tends to give the impression of bull or bear markets for all currency pairs which include the U.S. Dollar as the fortunes of the United States rise or fall respectively.

    Forex; Alternative to the Stock Market

    The forex market has often been the choice for many professional traders who had previously traded in the stock and commodity markets. Some reasons for their switch are rather simple: the forex market offers greater liquidity, longer trading hours and more trading opportunities.

    Furthermore, with the advent of forex electronic trading available by connecting to the Internet, in combination with the recently available online forex retail accounts, small investors can now access and trade the multi-trillion dollar forex market that was previously only available to banks and large corporations.

    Before the Internet, small traders were largely restricted to trading stocks or commodity futures and options, where retail accounts have, for the most part, always been available.

    Also, currency futures were not made available until just after exchange rates began to float in 1972. For many years, currency futures were the only way that retail traders could participate in the foreign exchange market.

    The forex market has some clear advantages for traders which cannot be found in other markets such as the stock market. Some of these features that the forex market offers traders compared to the stock market include:

    Liquidity

    The forex market makes up the deepest and most liquid market on the planet.

    Currency trading occurs around the clock by the world’s largest banks and financial institutions and helps ensure that a market maker or dealer will always be available to take either side of a trade.

    Conversely, trading in the stock market is limited to certain hours of the day, and liquidity can become almost nonexistent in some of the smaller stocks.

    Trading Hours

    The forex market remains open continuously from Sunday afternoon until Friday afternoon EST. This means that currency traders enjoy the longest continuous trading hours of any financial instrument.

    Stock trading is limited to certain hours of the day, with some highly capitalized stocks which may be traded on overseas markets.

    Expense

    Trading stocks can be quite costly, especially for active traders since commissions can build up significantly.

    Trading currencies is considerably less expensive in comparison since most forex dealers only charge a part of the spread instead of charging a straight commission.

    This means the cost savings in trading forex over trading in stocks can be considerable.

    Leverage

    One of the best reasons to trade in the forex market consists of the amount of leverage a trader can use. Trading in stocks requires 50% of the purchase price, or a 2:1 leverage ratio, while forex trades can be leveraged by as much as a 500:1 ratio.

    Because a trade in the forex market represents an exchange of equivalent assets, there is no initial cost in establishing a position. This differs from the stock market where one is actually purchasing an asset.

    Fewer Choices for a Trading Vehicle

    In contrast to the stock market, where thousands of stocks exist, the lion’s share of trading in the forex market occurs in just eight major and minor currency pairs quoted against the U.S. Dollar and several active cross rates pairs.

    This makes choosing a currency pair to trade substantially easier than picking from among the thousands of choices in the stock market.

    High Number of Participants in Forex

    Not only is the forex market the largest financial market worldwide, but it also includes a high number of participants.

    One of the primary benefits of having more active participants in a market is that it usually contributes to greater liquidity in that market.

    Advantages of Liquidity

    The basic idea behind liquidity involves how quickly you can convert an asset into cash. Of course, with currency trading, you can turn your spot trade into cash within just a couple of business days.

    When a market is highly liquid, that implies that it operates in a very efficient manner. Usually dealing spreads would also be quite competitive, with relatively low transaction costs.

    Read our previous article: Winning Forex Trade with Major Currencies

    Another advantage of high liquidity is the ability of a market to handle large transactions without the price moving too far as a result. Liquidity also generally means that orders will tend to be executed well, with minimal slippage on stop losses.

    When it comes to liquidity, the huge forex market easily comes out on top when compared to other financial markets like those for stocks, bonds, and commodities. It also offers 24-hour trading during the business week.

    Forex Participants That Help Provide Liquidity

    The main participants in the forex market that assist in providing liquidity generally fall into one of the following basic types:

    • Major Commercial and Investment Banks

      These are the big professional players in the forex market. By acting as both speculative traders and as market makers to clients and one another, their activities provide substantial liquidity to the forex market.

    • Governments and Central Banks

      These institutions can have a major impact on the forex market as they intervene to manage the exchange rate of their nation’s currency or shift currency reserves. At especially volatile times, central banks will often provide liquidity to help stabilize the forex market.

    • Large Corporations

      Many companies engage in business in other countries and this often requires that they participate in the forex market. Their hedging activities of foreign currency exposures often help provide considerable liquidity in the forex market, and they generally participate by acting as a large bank’s customer.

    • Hedge Funds

      These players largely act as speculative trades in the forex market to enhance their funds’ profits. Their large transactions can significantly increase trading volume and hence liquidity in the forex market.

    • Investment Funds

      When the managers of these funds invest internationally or shift investments from one nation’s market to another’s, they need to use the forex market to convert currencies. Usually acting as customers of large banks, their often large forex transactions, and orders, as they enter, exit and protect their foreign investments, can add significant market liquidity.

    • Individual Traders

      Such participants can range from wealthy individuals, who can often trade forex using credit lines that banks extend to them, to retail traders who participate on margin via online forex brokers. This group of participants provides an increasing amount of liquidity in the forex market.

    • Interbank and Retail Forex Brokers

      These firms act as intermediaries in forex transactions. Interbank brokers will generally only handle sizeable transactions between large banking counterparties, while retail forex brokers tend to provide access to the forex market for much smaller individual accounts. This access has made the forex market available to a much larger segment of the population and has significantly increased both the breadth and liquidity of the forex market.

    Few Profitable Currencies to Follow

    One of the reasons that many savvy traders consider forex the best market to trade is the little effort required to assimilate the knowledge required for trading.

    Also, the fact that most currency trading activity is limited to a handful of key currencies and currency pairs, commonly referred to as the majors, is a distinct advantage relative to other markets.

    This makes trading currencies a much simpler trading process, with only eight major and minor currencies to follow. The following sections provide a list of these primary currencies and descriptions of their most active pairs traded in the forex market.

    Check our previous article: How to get Forex latest market Information

    The Major and Minor Currencies

    The so-called major and minor currencies are listed below after their standard ISO 4217 three letter code. They are listed in order of importance as determined by their average daily trading volume seen in the forex market.

    • Majors

    1. USD – United States Dollar
    2. EUR – European Union Euro
    3. JPY –  Japanese Yen
    4. GBP – Great Britain Pound Sterling
    5. CHF – Switzerland Franc

     

    • Minors

    1. AUD – Australian Dollar
    2. CAD – Canadian Dollar
    3. NZD – New Zealand Dollar

     

    According to a 2017 survey by the Bank of International Settlements or BIS, the major and minor currencies listed above account for over 87% of all daily currency trading volume.

    In addition, the U.S. Dollar acts as either the base currency or counter currency in over 85% of all forex trades and so clearly dominates forex trading activity.

    The Primary Currency Pairs

    Below find a brief description of all the currency pairs which make up the main currency pairs traded in the forex market:

     

    • EUR/USD – The European Union’s Euro quoted in U.S. Dollar terms. The E.U. has the largest economy in the world by GDP, followed by the United States. This currency pair accounts for 27% of all forex transaction by trading volume.
    • USD/JPY – The second most active currency pair, the USD/JPY currency pair accounts for 13% of daily forex trading volume. The USD/JPY pair is one of the most liquid, and the dealing spread can be as low as one pip.
    • GBP/USD – Number three on the list is Cable or GBP/USD. The pair received its nickname at the end of the 1800’s from the Trans-Atlantic cable used to transmit the rate between New York and London. Cable makes up 12% of overall daily trading volume.
    • USD/CHF – The U.S. Dollar against the Swiss Franc. While not the most liquid currency pair, it still accounts for over 5% of total daily forex volume.
    • AUD/USD – The Australian Dollar versus the U.S. Dollar and nicknamed the Aussie. This pair reacts to commodities prices primarily because Australia is a major mining goods producer. China is one of the main markets for Australian exports.
    • USD/CAD – The Canadian Dollar versus the U.S. Dollar. Nicknamed the Loonie after Canada’s national bird that appears on its one dollar coin, the Canadian Dollar also acts as a commodity currency and so reacts to movements in both crude oil and gold.
    • NZD/USD – The New Zealand Dollar versus the U.S. Dollar and nicknamed the Kiwi. Not as actively traded as other commodity currencies, this particular currency pair accounts for less than 4% of forex trading volume. Nevertheless, it is a popular currency to trade among speculators.

    Conclusion

    Basically, a trader has a whole lot less to watch and hence less to worry about when trading in the forex market versus other capital markets. Having a limited number of currencies is clearly an asset that forex traders can use to their benefit.

    Forex Information Availability

    Because of the largely unregulated nature of the forex market and the fact that it involves national currencies, most information affecting the market is made available instantly worldwide. This provides a major advantage for forex traders.

    Also, this widespread information available in the forex market differs considerably from the way information is released that can affect individual stocks in the stock market.

    As a result, insider trading, as it is commonly understood in the stock market, does not really exist in the foreign exchange market.

    Read our previous article: Twenty-Four Hours Forex Trading

    Information Availability in the Forex Market

    Most of the information that affects the currency markets involves the release of economic data from different governmental sources in each currency’s home country.

    In addition to world current events, which tend to influence currency movements, forex traders also watch price charts and technical price indicators. Technical traders believe these analysis tools give them an edge when trading, and they can readily be obtained via software that has access to the Internet.

    A notable exception to the general openness of information available in the forex markets involves order flow. Generally, the only parties that are privy to large transactions occurring in the forex market are the two parties conducting it.

    The Internet Leveled the Playing Field Considerably

    With the exception of the aforementioned order flow data, the majority of forex traders obtain their market and economic information from the same sources. Essentially, news which influences the currency markets is now available to anyone with Internet access and the knowledge about how to obtain it.

    At the dawn of the modern electronic age and before the Internet had become widely available, technical price data and information feeds from companies such as Reuters and Telerate (Associated Press/Dow Jones) would cost a fortune that only banks and wealthy individuals could afford.

    Thankfully, the Internet has helped level the playing field in the forex market by bringing all of this information and the capability to trade the forex market to millions of individuals. Many of these people would not otherwise have been able to afford access to this huge market and its key information sources.

    How News Affects the Forex Market

    Most of the economic data and other information released by these sources are already anticipated by the various professional observers analyzing the economy. Nevertheless, news that differs significantly from the consensus expectation in the market can have a substantial impact on the forex market.

    For example, if the Gross Domestic Product or GDP for a nation came out at 1% when the market was expecting 2%, that would tend to provoke a sell off in that nation’s currency.

    Other currency pairs demonstrate notable sensitivities to the price of one or more commodities. For instance, a sharp increase in the price of crude oil would tend to produce a negative effect on the USD/CAD exchange rate. The reason for this involves the fact that Canada is a major exporter of oil to the United States, which is a net importer of oil.

    Read next: Few Profitable Currencies to Follow

    Twenty-Four Hours Forex Trading

    Among the numerous advantages that trading in the forex market offers, perhaps the most significant for many traders consists of the round the clock availability of forex trading during the five day business week.

    Specifically, forex trading opens the week in New Zealand on Sunday afternoon at 4 PM EST and then continues trading non-stop until Friday at 5 PM EST when the market closes for the weekend in New York.

    Basically, because different trading centers around the world operate on different time zones, and the forex market is global, the market can trade 24 hours a day. Accordingly, if you are a trader with workaholic tendencies, then trading the forex market might be just the right fit for you!

    The following sections cover various aspects related to forex trading times, and all times mentioned below will be expressed as U.S. Eastern Standard Time or EST for consistency.

    Time Table for World Forex Markets

    Forex trading begins each week with the opening of markets on Sunday in Auckland and Wellington, New Zealand at 4:00 PM. This is followed one hour later by the Sydney open at 5:00 PM. These markets stay open until 1:00 AM and 2:00 AM respectively.

    At 7:00 PM, the market in Tokyo opens, followed by Singapore and Hong Kong at 9:00 PM. Tokyo closes at 3:00 AM, while Hong Kong and Singapore close two hours later at 5:00 AM.

    The beginning of the European day begins at 2:00 AM, which is when the Frankfurt trading opens. The day in Tokyo then comes to a close at 3:00 AM as London is opening at the same time. London then closes at 11:00 AM.

    The European trading day overlaps with the United States beginning when Europe is in full swing at 8:00 AM and continues until London closes at 11:00 AM. Trading in New York then continues until 5:00 PM which brings us once again to the 4:00 PM opening time of New Zealand, followed by Australia at 5:00 PM.

    Overlapping Time Zones Increase Liquidity

    The periods when different world markets open simultaneously during the day can be the most liquid times to trade for some currency pairs. They also often provide the widest pip range in exchange rate moves from which a speculator can profit.

    Essentially, since higher liquidity and more volume tend to benefit speculative forex traders, these overlapping time frames in which trading is usually more active can give the trader an edge to increase profits.

    Less Liquid Forex Times to be Aware Of

    While the benefits of around-the-clock trading can seem obvious, certain trading times can be considerably less liquid than others. For example, the opening in New Zealand at 4:00 PM often results in a very thin market for an hour or so, at least until trading in Sydney, Australia gets active after 5:00 PM.

    Also, between the hours of 5:00 PM and 7:00 PM when Tokyo opens, the only markets open after the New York close are Chicago until 6:00 PM and some West Coast offices of large banks, as well as Sydney and New Zealand.

    Also, more caution should be observed when trading in the forex market on Sunday nights and bank holidays, since trading can often be thin during those times.

    Fridays can also present an issue for traders since the market generally moves countertrend as positions are squared ahead of the weekend. In addition, key economic numbers are often released on Fridays.

     

    Forex: The Most Traded Asset in the World

    As a whole, currencies make up the most actively traded assets in the world. Almost $6 trillion in different currencies change hands each day in the foreign exchange market, which has become the largest financial market on the planet.

    The forex market consists of many participants, some wishing to hedge foreign exchange risk for commercial ventures, while other participants trade the market with the sole intention of making a profit.

    Because of the enormous depth of the market and a large number of participants — including a growing number of retail forex traders — no other financial market can offer the profit-making possibilities of the forex market.

    Read our Previous Article: The Euro’s Rising Influence

    The Incomparable Size of the Forex Market

    As mentioned above, the daily turnover in the forex market approximates $6 trillion. This number surpasses the size of the international bond market by a factor of 10 and that of the international equity market by a factor of 50, according to some recent estimates.

    Because of this large size, and the fact that currency trading goes on continuously 24 hours, five days a week, trading in the forex market offers more opportunities than any other market in the world.

    Furthermore, trading in the forex market was once limited to large banks, multi-national enterprises, and high worth individuals. Nevertheless, with retail Internet forex brokers, anyone with a computer, an Internet connection and a small amount of money can now trade in the forex market.

    With a large number of participants in the forex market and the recent growth provided by the retail market, the resulting liquidity makes for even better trading conditions.

    Liquidity and its Benefits in the Forex Market

    One of the major reasons that the currencies traded in the forex market has become the most traded asset in the world is because of the high degree of liquidity generally seen in the forex market.

    In basic market terminology, the word liquidity refers to the ability to convert an asset into hard cash, as well as the amount of activity which occurs in an asset over a period of time.

    For example, the market for real estate would not fit the description of a liquid market. Essentially, owning real estate as an investment will not guarantee that you can liquidate the asset quickly since sometimes it can take years to liquidate real estate.

    A spot forex transaction, on the other hand, usually settles within two days of the transaction, and when trading the Canadian Dollar against the U.S. Dollar, spot trades settle in just one day.

    Some of the pricing advantages of liquidity consist of lower transaction costs and tighter bid/offer spreads. Also, high liquidity means that large transactions can be handled smoothly and it tends to ensure a more orderly market, with an absence of price vacuums which can cause extreme price swings.