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GDP, Trade Balance & Currency Markets

Learn forex scalping. Economic growth of countries can also have a big impact on the overall currency market sentiment besides the interest rates. United States is the largest economy in the world. US economy is the key factor in determining the global currency market sentiment. US economic growth figures affect the major currency pairs like EUR/USD, GBP/USD, CHF/USD and JPY/USD.You can trade forex news.

Discover a revolutionary new forex robot. A strong economic expansion coupled with a healthy labor market tends to boost consumer spending in the country. This helps in selling the stuff produced by the local companies and businesses.

A country with a strong economy is in a better position to attract foreign investors. Investments pouring into the country increase the demand for that currency. This increased demand causes that currency to strengthen against other currencies.

How do you measure the economic performance of a country? Three of the most important indicators of a country economic growth are: 1) Gross Domestic Product (GDP). 2) The unemployment rate and 3) The trade balance or the current surplus or deficit. Let’s discuss these three economic indicators.

GDP: GDP measures the total good and services that are produced in a particular country in a one year. Actually we will be usually talking about the GDP growth rate whether the economy is expanding or contracting. A healthy GDP growth rate figure usually adds a bullish sentiment to the currency of that country especially if it exceeds the market expectations. Always remember the markets react violently to surprises.

Unemployment Rate: The unemployment rate data reports the state of the labor market in the country. A low unemployment rate is considered to be a positive for the country’s economy and its currency. A low unemployment rate means almost all the consumers have jobs and they are willing to spend more. The more the consumer spends, the more the companies and businesses in the country sell. This generates more output and further expands the economy.

Trade Balance: This is another widely watched economic indicator in fundamental analysis. If a country exports more than it imports, the trade balance is in surplus. If the imports are more than the exports, the country will end up with a trade deficit. Trade deficits are not good and must be balanced by the capital account surplus otherwise a balance of payment problem will ensue.

For example, if US import more from Europe, USD will have to be sold in order to buy Euros to pay for those imports. This will result in the depreciation of USD relative to the Euro and other currencies. The opposite is true in case of a trade surplus. USD will strengthen relative to Euro.

Geopolitical risk is also very important. It refers to the risk of a country’s foreign or domestic policy affecting domestic social and political stability in another country or the region. Geopolitical risk can cause the currency of a country to move up or down relative to other currencies in short as well as long term.

COT Report (Part II)

You should focus on the non-commercial participants rather than on the commercial participants when you look at the COT report. You would ask the reason for ignoring the commercial category. Commercial participants are mostly trading forex futures for hedging purposes. They keep on rolling on their positions from month to month for hedging even though they maybe taking losses. This way they are hedging the foreign exchange risk for their business transactions.Try Netpicks forex signal service.

Get good forex training.However, large speculators like the hedge funds and the banks trade the forex futures contract for speculation and capital gains only. Most will immediately close their losing position instead of rolling it over to the next month. Large speculators do not have any intention of taking delivery of the currency in cash like the commercial participants. Learn forex trading.

There is a close correlation between the forex futures market and the spot forex market. By gauging market sentiment in the forex futures market, you can also gauge the market sentiment in the spot forex market.

Forex futures are basically spot prices adjusted for the forwards to arrive at the future delivery price based on the interest rate differentials. Near the maturity of the forex futures contract, both the prices converge. Prices become equal on maturity.

The main difference between the spot forex market and the forex futures market is that the spot forex market is not a centralized market. It is an Over the Counter (OTC) market. However, Forex futures are traded on a Centralized Exchange Chicago Mercantile Exchange (CME). CME functions as a clearing house between the counter parties.

There are some differences in price quotation system used in both the markets that you should become familiar with. However, the spot and futures prices of a currency tend to move in tandem. When either the spot or the future price of the currency rises, the other also tends to rise and when either falls, the other also tend to falls. For example, if GBP futures price goes up spot GBP/USD goes up too.

Calculate the net position of the non-commercial contracts in the COT report by subtracting the total long positions from the total short positions. Usually when a particular currency is trending up against the US Dollar, the non-commercials tend to register a net long position. This is due to the fact that the large speculators like to continue riding the trend as long as it lasts.

The opposite would be also true when a particular currency is trending down against the US Dollar. The non-commercials will have a net short position. By comparing the latest net positioning with that of the past few weeks or months, you can tell if the latest net positioning is skewing towards an extreme reading.

Dramatic price moves like the major turning points tend to occur when the majority of the market is positioned incorrectly. By keeping an eye on the net directional positioning and net contract volume in the non-commercial category, you can detect turning points in the spot forex market with the COT reports.

What deters many traders from using the COT report is its raw organization of data. COT report is a treasure trove. You can use your COT report analysis to optimize your trading strategies. Entry and exit cannot be timed solely based on COT report but it can generate warning signals of a possible turn ahead in the spot forex market.

COT Report & Currency Trading (Part I)

What are the ways of measuring the market sentiment? The mood of the market depends on what the majority of the traders think about the current market situation. How do you get an idea of the overall market sentiment? By reading reports of analyst and financial journalist in the news wires! You can also join online trading forums to see what other traders are thinking.Develop your own forex trading system.

Get good forex training. You may think that the other traders are in a buying or selling mood. But that may not be what is really happening in reality. This way of getting the feel of the market sentiment is not very accurate.

Learn forex trading. You will ask how you gauge the market sentiment then. You can accurately gauge the spot forex market sentiment by analyzing the Commitment of Traders (COT) report. What is COT report? The COT report provides the detailed positioning information about the futures market on a weekly basis.

COT report is one of the most underrated reports. Many forex traders don’t know about it. Forex traders can use COT report to gauge the market sentiment. You can assess the COT report on the CFTC website for free. The COT report is compiled and released by the Commodity Futures Trading Commission (CFTC) in the United States on a weekly basis every Friday at 15:30 EST.

Basically two types of COT reports are made available. The one is the futures only COT Report and the second is the futures and options combined COT Report. A look at the futures only COT report will give you the glimpse of what has happened in the futures currency market and its implications for the spot forex market.

The data arrives three days later. Many traders spend their weekends going through the COT report. So the information in the COT report can be nonetheless useful to you. No doubt there is a time lag between the reporting of data and the release of the report but still you can use this report to gauge the market sentiment.

There are three categories in the COT report. The three categories are: 1) Commercial, 2) Non-commercial and 3) Non-reportable. The COT report tells you the long and short positions undertaken by participants from each category.

Commercial: This category consists of market participants who use the futures contract for hedging purposes. These commercial participants are mostly exporters and importers who hedging against the currency fluctuations risk. For example, Japanese company Toyota expects to receive $500 million worth of sales from the US market in the next quarter.

In order to hedge against the US Dollar decline, Toyota company will short $500 millions in JPY Forex Futures. Similarly if the US pharmaceutical company exports $50 million worth of drugs to the Japanese market in the next quarter, it will long $50 million JPY Forex Futures.

Non-commercial: The non-commercial category consists of large speculators like hedge funds, banks, institutional investors and so on who want to speculate in currency futures.

Non-reportable: This category comprises small speculators like you and me also known as the retails traders.

Understanding Market Sentiment

Understand the forex market. Do you see the market as a big mechanical matrix which is devoid of emotions? How do you view the forex market is very important. Most traders have a love hate relationship with the market thinking that the market is either against them or for them.You can trade forex news.

The truth is that forex market is just the compressed display of emotions. At anyone time the market is emanating the emotions of currency speculators around the world. Develop your own forex trading system.

A market is like a big living organism. Think that this organism is made up of millions of cells. Each cell carries its own functions. It also interacts with other cells of the body keeping the living organism alive around the clock.

A forex market comprises millions of participants acting out their perceptions and emotions. Knowing what the market thinks and how it thinks is crucial to trading success.

Ultimately, you as the trader are dealing with other traders out there in the market whether they are big institutional players or an independent individual trader like you and me. You need to know what the other participants are thinking.

Market sentiment is the most important factor that drives the currency markets or that matter any financial market. What is the market sentiment? Market sentiment is simply what the majority of the market participants are perceived to be thinking or feeling about the market.

Traders tend to act based on what they feel and think of certain currencies regarding their strengths or weaknesses relative to other currencies. Market sentiment sums up to the overall dominating emotions of the market participants. It explains the current actions of the market as well as the future course of action.

One thing you should know is that market sentiment is not logical. It is primarily based on trader’s emotions. These emotions are one of the greatest factors in the determination of the currency exchange rate.

Market sentiment is like a fickle lover. It is capable of changing its mind based on new information that can upset the existing emotion. Market sentiment can be bearish, bullish or just plain confused.

If the majority of the market participants want to sell the currency, the market sentiment is deemed to be bearish. If the majority wants to buy that currency, the market sentiment is bullish. When most market participants are unsure of what to do at a particular moment, the sentiments end up being mixed up

If you can understand what the other traders are thinking and why the market is doing what it is doing, you will be in a better position to plan the entry and exit for your trade. Understanding the current market sentiment and exploiting it with an appropriate trading strategy can help maximize your trading profits. In Part II of this article we will discuss what factors influence the market sentiment.