Forex traders usually use two methods of analysis prior to trading. These are the fundamental analysis and the technical analysis. Technical analysis reads the past and tries to predict when a stock is supposed to break or reverse in future. It uses many tools for the purpose. These may be the candlestick patterns, Fibonacci graphs, trend lines and other sources. The next method is the fundamental analysis. It basically deals in the “why” of the matter. Why does a stock fluctuate; rally or reverse. A subset of fundamental analysis is trading the news; many traders follow major economic news around the world and trade it as it breaks.
There are eight top currencies around the world. The countries to which the currencies belong are all present day superpowers. This means that the currencies can affect world market easily. News which is related to these countries can hence be traded for high profits. Though it is not as easy as it sounds; a lot of external things come into the picture.
The major eight currencies are US dollar, Euro, British pound, Japanese Yen, Swiss franc, Canadian dollar, New Zealand dollar and Australian Dollar. A trader also trades in many currency pairs which are nothing but the derivatives. The imbalance proposed by the currency pair is read by the trader in advance to make profits.
These pairs can be EUR/USD, GBP/JPY and others. The major economic data released by these countries have the force to change the trading structure of market. Few data can have a 20 minute trading value. Few can be traded for the entire day and others still might last 2 days or more. It depends upon the strength of the data.
Some major news which affects the market is interest rate, trade balance, unemployment, industrial production; cash reserve ratio, Repo rate, credit structure, business surveys and so on. While the first one impacts the market as it may bring a lot of movement in real estate, banking and credit structure of the country, the second one can show the fiscal strength of a country. Positive news on these grounds suggests that a trader can bank on the related currency and play for a rise.
Look to trade in only those data which can bring a focal change in the direction of the market. This means that interest rate, trade balance, industrial production and even Repo rates or CRR can be quite a handful. Similarly, these have a tendency to stop you out if you do not use caution. Many unimportant news has a low shelf-life and will burn out before you look for them. Look to trade only when there is no collision between actual and revised data. Also the actual data should deviate properly.
Sometimes the market does not have enough force to sustain a move and at other times you may be stopped out before the market reverses because of high volatility. It is good to play for consolidation and only trade in the market at the time of breakout.