Besides trading based on the news, you can use fundamental analysis to determine the major trends in the Forex market. I`m referring to the long term trends that last for months, influenced by decisions made by traders on political, economic and social factors which influence the exchange.
On the long run, the currency of a more powerful economy should appreciate. The main reason is this: most people want to invest in the stronger economy, so they buy the currency of that country, and it appreciates.
Unfortunately, the situation from above occurs over many years and it doesn`t help us in trading; a couple of years trend is too long to be used in Forex on short term speculation. However, trends that last several months may be profitable by analyzing the Risk tolerance of the traders.
One of the most important elements to take into account is how the participants of the forex market see individual currencies: risk and backup Currencies.
Most times, when traders are feeling optimistic and have a higher risk tolerance, they tend to buy Risk Currencies and sell the backup ones.
When the market feeling is pessimistic, risk currencies tend to depreciate, and Backup Currencies appreciate.
The high risk currencies are:
- EUR
- GBP
- CAD
- AUD
- NZD
And the backup currencies are:
- USD
- JPY
- CHF
At the same time, there are many other fundamental factors that determine the evolution of a currency.
For example, Canada is a Major oil exporter and USA a major importer. The percentages vary from year to year, but always a big part of Canadian oil is bought by companies in the United States.
How do you think USD/CAD pair is influenced by the price of oil?
Let’s imagine that the price of oil rises sharply in a short time. American companies will have to pay more for import oil from Canada, so they buy more Canadian dollars from banks. The Canadian dollar will appreciate, and the USD/CAD will decrease.
The same thing is happening with Australia, a major gold exporter: Australian dollar price is directly correlated with the price of gold.
The correlation between NZD and gold is not as high as for the Australian dollar, but is worth taking into consideration when there are large movements in the price of gold.
The bottom line is that you must use fundamental analysis if you want to determine the Major Trends in the Forex market. Unfortunately, in the short term, it`s very difficult to trade based on news due to small delays (few minutes, sometimes) with the economic calendar, broker`s quotes and delays due to market`s movement speed.
