The Fundamentals of Forex Trading

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Investors have an opportunity to invest in domestic markets (such as Dow Jones, NASDAQ, S&P 500 etc.) or venture outwards and look into foreign-exchange markets, known as Forex markets.

Forex markets pertain to the relative trading of currency, but consequently, this presents an inherent challenge – the lack of “financial” indicators that can demonstrate the opportunity or risk of the investment. For example, when investing in stock of a company, we can consider the company’s balance sheet to take a look at its financial performance and history, but unfortunately, there is no such equivalent for a country.

The first indicator an investor can take a look at is the Gross Domestic Product, or GDP of the company. The GDP can be considered equivalent to the profit margin of a company, as both metrics measure internal growth. Next, retails sales can provide additional perspective into the economic strength of the country. Specifically, retail sales can give us a sense of customer spending habits.

Finally, the consumer price index (CPI) provides a measure of price changes of consumer goods over time, again demonstrating how profitable a country as a whole is.

These three metrics serve as a starting point for an investor to consider, but there are still many more – Employment Cost Index, Producer Price Index, Purchasing Manager’s Index for starters. Because there can be so many metrics to keep track of, it may be wise to invest in an economic calendar to monitor them all!

 

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