LOWERING TRADING RISK

Lowering Trading Risk or Trading Risk Management: 

There is always going to be risk on the Forex market. To believe any strategy to be risk-free is a fallacy. However, you can lower the amount of risk you face by following a few simple steps. With practice, you will also find that your successful and profitable trades increasingly outnumber the ones where you merely break even or lose money. The following are some simple ways to reduce your risk.

Create a Detailed Plan

If you don't know why you intend to buy or short sell a particular currency, don't do so in the first place. There are few worse ways to trade than to start trading without any sort of plan. Trading without a plan is the most sure-fire way to slowly, but certainly, drain your account.

If you plan well, however, you will grow to understand the trends you wish to use and the tendencies of other traders regarding your currencies of choice.

Use Your Trading Log

Your trading log is your best friend in the Forex world. By keeping a detailed log of all your activities, their purposes and the market's condition during those activities, your success will grow far more quickly than if you simply try to use intuition to figure out where you went wrong.

Your trading log will tell you where you went wrong with previous trades and will help you build on your successful ones. When you understand where you've gone wrong in the past, you can avoid repeating your earlier mistakes. You can also work on repeating your past successes by identifying patterns that will help you.

Every successful trade will show you more of what you're looking for. When you trade well, you learn how to be a more successful trader.

WHAT IS A LIMIT ORDER?

What is a Limit Order? Limit orders are trades on a currency pair where you wish to buy or sell your currency of choice at a particular rate. Contrary to a market order, a limit order allows you to exercise more control over your pricing and affect how much profit you end up making. The downside to limit orders is that they can take a long time to be fulfilled if the market isn't cooperative with your bid or ask price.

Why Limit Orders Exist

A limit order allows you to control the amount you trade for a particular currency. If you're following a trend and want to be sure you get in at a particular point on where you project it's going, a limit order is a very good way to ensure your target rate.

For example, you can place a limit order for AUD/USD for 1.0815. If the current rate is 1.0831, you have a 16 pips difference. It may be hours, days or even months before the pair trades for your intended rate, but when it does, you'll get it.

Another reason you might consider limit orders is because you can reduce your risk of loss and increase your likelihood of making a profit via their use. If you want to open a position on an especially volatile or low volume currency pair, this can be an excellent way to ensure you get it for the rate you want.

How to use a Limit Order

To use a limit order, begin by following the same steps you normally would to place a market order. Then, find where you select "limit order" and select it. At that point, enter your intended rate and whether you want your limit order to expire. Some limit orders will continue indefinitely until they're filled while others will expire at a certain time.

From that point onward, you may continue with your research, other trades or unrelated business. When the rate meets the one you establish, your position will open.

Similar Orders

A similar type of order to the limit order is the stop order. It serves in a similar function but in a slightly different way.

A stop order is similar in that it's attached to a particular price. It's different in that once your intended rate is reached, a stop order becomes a market order and is fulfilled at the market's price. This can sometimes mean your ultimate bid or ask price ends up being worse than you intended.

WHAT ARE STOP LOSS AND TAKE PROFIT ?

Stop Loss and Take Profit orders: Two of the most useful tools to trade the Forex market are stop loss and the take profit orders. While these are fairly simple to set up, both can be tremendously useful in your trading. A stop loss order is used to help you minimize any losses. A take profit order lets you close a position at a predetermined rate when it is reached. Used together these two types of orders are very useful for helping you maximize your profits and minimize your losses whenever possible.

The Stop Loss

A stop loss order is when you set a trade to happen if your currency goes in a direction that would cause you to lose money. For example, if you sold a currency short with the intention of letting its value decrease and buying it back for a profit, you could set a stop loss order if the currency moved upward a certain number of pips. Additionally, if you bought a currency and it began to fall, your stop loss would keep you from losing more than a particular number of pips by selling the currency automatically.

Stop losses are essential in the FX market because most traders use margins. If a margin call happens and you do not have a stop loss in place, you could end up being liable for all of the money you've lost.

Some traders use stop losses as their primary way to exit a position. For a trader with nerves of steel, there is the temptation to hold onto a currency position no matter what happens. In some cases the most pragmatic option is to simply cut your losses and move on to a more profitable trade. With a stop loss order in place, your trading window does this for you automatically.

The Take Profit

A take profit is an automated order you set so that your account will liquidate a particular currency position if you profit by a certain number of pips. This way you ensure yourself a profit. The downside to the take profit is that sometimes you get in on the ground floor of an especially profitable trend that continues long after you've exited, and you accidentally deprive yourself of an even more profitable trade.

How to use Them

Within reason, both stop losses and take profits are very useful in your trading. With a stop loss you can prevent yourself from falling victim to a margin call or simply limit your potential downside. With a take profit you can keep yourself from falling into the trap of excessive greed and make a potentially smaller, but guaranteed, profit from a successful trade. You should plan both your stop loss and your take profit orders whenever you intend to make a trade and before you actually open your position.

HOW TO OPEN A POSITION ?

Opening a position on the Forex market is slightly different from doing so on other kinds of markets. For one thing, you can open a position by either buying or selling a currency with equal ease. For another, you have several different ways to open a position. While every online trading site has its own unique interface, the methods of opening a position are similar wherever you decide to trade.

It's important to understand that opening a position means buying one currency and selling another. Even when we sell one currency short we buy a different currency instead. There is always one currency being bought and one currency being sold.

What you Need to Open a Position

The first thing you'll need to open a position on the FX market is a trading account. If you aren't yet comfortable trading with real money, a practice account will do. If you're using a real account, you must also have funds to trade with. If you have these two components and the market is open, you can open positions.

Types of Orders

The following is a list of all the basic types of orders you can issue:

• Market order
• Limit order
• Stop-loss order
• Limit entry order
• Stop-entry order
• OCO or one cancels other order

A market order means you either buy or sell at the current market price. By contrast, limit orders are used for entering positions at a pre determined price. A trader can utilize a Take Profit order to close his market position when he reaches his profit target. The stop-loss order is made so that your position will be closed when the currency price reaches the price you chose as a stop loss. With a Stop Loss order, traders can specify a closing point for a losing market position.

Limit entry orders will open when the price reaches the limit entry rate given. If you want to buy the pair the limit entry order will be lower than the current market rate. If you want to sell the pair it will be placed higher than the current market rate. Limit entry orders are used mostly for range bound trading.

By contrast, a stop-entry order is used to either buy for more than the current market price or sell for less, which is useful if you believe a trend will continue. A stop-entry order is the opposite of a limit entry. When you want to join a breakout in either direction (up or down) you place the stop-entry order outside of the bounded range. The trader placing this order believes that if the market reaches that rate the trend movement will be confirmed and continue in that direction.

Opening Your Position

In most Forex trading windows, all you have to do is pick a currency pair and select what you want to do with it. For example, if you pick GBP/AUD you can either buy or sell the first currency, in this case the British Pound. You are essentially borrowing Australian Dollars to purchase British Pounds or you short sell the Pound to get Australian Dollars, depending on which way you open your position.

MAJOR CURRENCIES, COMMODITIES AND INDICES

The Forex market is full of different holdings one can trade, and some of these possible investments aren't even currencies. There are numerous possible currency pairs, but only a few trade at a high enough volume to be considered major. You can trade Thai Baht, but it will probably never have nearly as much volume as British Pounds. Let's look at the most major assets on the FX market.

Major Currencies

The seven most widely traded currencies on the Forex market are:

• US dollar or USD
• Canadian dollar or CAD
• Swiss Franc or CHF
• Euro or EUR
• Japanese yen or JPY
• British pound or GBP
• Australian dollar or AUD

Top Commodities

Commodities, in this case, can refer to both commodity-heavy nations and actual commodities traded for currencies. Some of the most major commodity-related currency pairs are the USD/CAD, USD/AUD and USD/NZD. NZD stands for New Zealand dollar. Although the NZD isn't traded enough to stand among the top currencies, it is traded highly enough to be a serious player among countries with a lot of natural resources.

Some commodity futures that are traded against currencies are gold, silver and crude oil. Since these are the most vital resources for most of the world's economies, trading them effectively is a high priority. These can be paired with most of the heavily traded currencies, but they are most commonly paired against the US dollar.

Indices of Note

A Forex index is an indicator of how strong a currency is relative to other currencies. Since Forex trading is just matching one currency against another, it's traditionally hard to evaluate how strong a currency is against the rest of the market. Using an index, a currency is compared against a basket of other currencies.

The most major indices are based on the most widely traded currencies listed above, and they are primarily compared against each other. One major exception to this is the US dollar index, which is compared against the Euro, Yen, Pound Sterling, Canadian Dollar, Swedish Krona and Franc.

You have an immense number of different investment opportunities in the Forex and futures markets. In addition to trading currencies against one another, you can also trade commodities and even indices where one currency is compared against several others. These options allow you to trade in a multitude of different ways based on more complex strategies that more effectively take into account the larger global picture.

WHAT IS PIPS ?

The Basis of Everything

Forex Pips are the smallest units of possible change in a given currency pair. When a pair trades one pip differently, it might be .01 as in the case of a currency pair with Japanese yen as the second unit. It might also be a .0001 difference. The first of those two examples would mean that the change is a one percent difference, whereas the second example means the change is 1/10,000, or one percent of one percent. A pip is the smallest unit of movement.

How to Calculate pip Values

The formula for calculating a pip's value is the pip's decimal place times the amount of units you've bought. For example, if you've purchased 100,000 units of the EUR/USD pair, you've bought 100,000 Euros using US dollars to buy them. This currency pair is calculated at four digits after the decimal point, so each pip equals .0001. At 100,000, every pip is worth $10. If you purchased 100,000 units of EUR/USD at 1.4567 and the pair moved up to 1.4577, you've just gained 10 pips or $100.

A pip's value can be variable. In the case of the Japanese Yen, the USD/JPY pair is unique in that it only features 2 units after the decimal point. This is unique among the Forex market, and is more common among commodities like gold or corn. An example is if you buy the USD/JPY pair you are buying 100,000 units of USD or 100,000 USD with Japanese Yen. Each pip is worth 1,000 yen. If the rate goes from 71.32 to 71.42, you've made 10,000 yen profit which is then translated to US Dollars on our trading platform.

Using our formula, the second currency in the trading pair is the currency used to calculate the value.

How to Think of Pips

So, what are pips? in a nutshell, every pip is a unit of change, so you can think of pips as the drivers of your gains or losses. If you're holding a currency pair that changes by a few pips, you may have just made or lost several hundred dollars. Since this change can happen quickly, it's important to pay close attention to pips. Since the Forex market is all about equal exchanges, it can be challenging to think of this kind of trading. You have to get away from thinking in terms of your native currency.

A pip is the basic unit of one currency's value compared to a currency it's paired against. Often a pip is only one percent of one percent or 1/10,000 of a position's value. A single pip with leverage can make a significant difference in how much money you make when trading a currency pair.

WHAT IS MARGIN AND LEVERAGE?

The concepts of leverage and margin are widely used in most financial markets. Investors can use the idea of leverage to potentially increase their profits on any particular investment. In the Forex markets, the leverage on offer is among the highest available in the financial markets. Typically, in the forex markets, leverage levels are set by your broker and can vary from 1:1, 1:50, 1:100 and even higher.

To invest in forex trading, the first thing you need is a trading account with a broker. The initial amount that needs to be deposited into this trading account will depend on the margin percentage agreed between you and the broker.

Standard trading is done on 100,000 units of currency. For this level of trading, the margin requirement would typically be from 1 - 2%. On a 1% margin requirement, the investor would have to deposit $1,000 to trade positions of $100,000. Effectively, the investor is trading 100 times his or her original margin deposit. The leverage in this case is 1:100. One unit controls 100 units

Leverage of this magnitude is significantly higher than the 1:2 leverage usually provided on equity trading for example or the 1:15 on the futures market. These leverage levels are only possible due to the lower price fluctuations on the forex markets as opposed to the higher fluctuations on the equity markets.

Typically forex markets change less than 1% a day. If the forex markets fluctuated as much as the equity markets for example, forex brokers would not be in a position to offer such high leverage as this would expose them to higher than acceptable risk levels.

Using leverage allows for significant scope to maximize the returns on profitable trades. After all, applying leverage means you can be controlling currencies worth 100 or more times the value of your actual investment.

Leverage is a double-edged sword however. If the underlying currency in one of your trades moves against you, the leverage in the trade will magnify your losses.

If this happens and your margin drops below the required levels, Capital One Forex may initiate what is known as a "margin" call against you. In this scenario, we will either instruct you to deposit additional funds into your account or close out some or all of your positions to limit loss to both yourself and us.

Your trading style will greatly dictate your use of leverage and margin. A well thought out trading strategy, prudent use of trading stops and limits and effective money management can make for profitable application of leverage and ultimately, profitable trading.

At Capital One Forex, clients may select their required leverage from 1:1 all the way up to 1:300.

Clients looking to change their leverage levels can do so by submitting a request to: accounts@capitaloneforex.com

If you are looking to trade higher leverage - keep in mind: Leverage is a tool. Used properly it can allow for maximized profits. Used unwisely, leverage can turn around and bite.

WHAT IS SPREADS ?

The Spread in the Forex markets is the difference between the various buying and selling prices on offer for any particular currency pair. Before any trade becomes profitable, traders must first make up the spread. Lower spreads means trades move into the positive column earlier. Many traditional Market Maker forex brokers proudly advertise their low fixed spreads as being an advantage to traders.

The truth is fixed spreads do not offer any significant advantage and are subject to broker tactics such as widening - a tactic whereby forex brokers with dealing desks manipulate the spreads on offer to their clients when client trades move against the broker.

Capital One Forex's ECN/STP trading model does not have a fixed spread. This means the spread on offer will accurately reflect the true buying and selling rates for a particular currency pair and ensures investors are trading under real market conditions of supply and demand.

A fixed spread may seem like a good thing when market conditions are optimal and there is heavy supply and demand. The fact is, a fixed spread remains in place even when market conditions are not the best and regardless of what the true buying and selling rates for any given currency pair are.

Our ECN/STP model provides our clients with direct access to the other Forex market participants (retail and institutional). We do not compete with our clients or even trade against them. This grants our clients more advantages over dealing desk market makers:

• Very tight spreads
• Better rates
• No conflict of interest between Capital One Forex and its clients
• No limits on Scalping
• No “stop-loss hunting”

Capital One Forex strives to offer its clients the most competitive rates and spreads in the market. This is the reason we have invested heavily in establishing strong relationships with the most reputable and reliable liquidity providers. The Capital One Forex advantage means our clients enter the forex arena on the same terms as the majors. Prices are streamed from various liquidity providers to Capital One Forex’s Aggregation Engine which then selects the best BID and ASK prices from the streamed prices and posts the selected best BID/ASK prices to our clients, as illustrated in the flow diagram below.

Prices are collected from our liquidity providers and the best BID/ASK prices are sorted by our aggregation engine and presented to our clients. No intervention or manipulation.

Forex trading the way you asked for.

What Is Forex ?

What is Forex? Forex, or FX, is a shortening of the words foreign exchange, and the Forex market is where different countries trade one type of currency for another. For instance, the Chinese can trade their renminbi or yuan for American Dollar. The value of currencies on the Forex market is affected by supply and demand.

The Gold Standard

The Forex market actually began with the first international gold standard in 1875. At that time, every major economic power priced an ounce of gold at a certain number of their currency's units. This made it far easier for countries to trade among themselves without having endless bartering sessions, or even wars, to settle the trades.

Countries tended to go on and off the gold standard through the early 20th century and into the world wars until, after World War II, the final attempt at a gold standard appeared: the Bretton Woods System. This system used gold to trade between nations with currencies basing themselves off of an ounce of gold.

It Couldn't Last

Unfortunately, even the Bretton Woods system of the gold standard proved impossible to support. Some countries are more efficient producers than others, and the resulting imbalances in trade made the gold standard unfavorable to less productive countries. A nation needs a lot of gold to support such a standard, and a trade deficit could drain the national coffers dry in a short time. Most of the world's economies had left the various types of gold standard behind shortly after the second World War ended, and the United States finally overturned the Bretton Woods Act in 1971.

A new Way

Because of the decision to move beyond gold, the world's central banks had to decide how they would trade with other countries. The method ultimately decided upon proved to be the Forex market we use today.

In this market, banks from various countries bring different kinds of money to the proverbial table and trade a certain amount of one currency for a certain amount of another currency. Some currencies will float, which means their value can change based on momentary supply and demand. Other currencies are merely pegged to the value of another currency, which means they will always have exactly the same value compared to the currency they're pegged with.

The Forex market is split up into several different levels of access. At the very top are the central banks of the world, and below them are different companies such as hedge funds. At the very bottom of the hierarchy are individual retail investors, who have to pay the largest amounts of spread for each transaction they make.

Trading Tips

1. Know yourself. Check and define your risk tolerance carefully. Realize your needs.

In order to profit in trading, you must recognize the markets. To recognize the markets, you must first know and recognize yourself. The first step of gaining self-awareness is to make sure your risk tolerance and capital allocation to forex and trading are not excessive or lacking. This means that you must carefully study and analyze your own financial goals when you enter forex trading.

2. State your targets. Make a plan.

Once you know what you want from trading, you must systematically define a timeframe and a working plan for your trading career. What would be determined as a failure, what would be defined as success? What is the timeframe for the trial and error process? How much time can you devote to trading? What is your ultimate goal? These and similar questions must be answered before you can gain the clear vision necessary for a persistent and patient approach to trading. Also, having clear goals will make it easier to abandon the endeavor entirely in case that the risks/return analysis precludes a profitable outcome.

3. Choose your broker carefully.

While this point is often neglected by beginners, it is impossible to overemphasize the importance of the choice of broker. That a fake or unreliable broker invalidates all the gains acquired through hard work and study is obvious. But it is equally important that your expertise level, and trading goals match the details of the offer made by the broker. What kind of client profile does the forex broker aim at reaching? Does the trading software suit your expectations? How efficient is customer service? All these must be carefully scrutinized before even beginning to consider the intricacies of trading itself. Capital One Forex through its various account levels cater to all types of traders and can give you a custom made trading deal to suite your trading needs.

4. Pick your account type, and leverage ratio in accordance with your needs and expectations.

It is necessary that you choose the account package that is most suited to your expectations and knowledge level. The various types of accounts offered by Capital One Forex are made with the thought that different traders have different needs. If you have a good understanding of leverage and trading in general, you can be satisfied with a standard account. If you’re a complete beginner, it is a must that you undergo a period of study and practice by the use of a mini account. In general, the lower your risk, the higher your chances, so make your choices in the most conservative way possible at the beginning of your career.

5. Focus on a single currency pair, expand as you better your skills.

The world of currency trading is deep and complicated, due to the chaotic nature of the markets, and the diverse characters and purposes of market participants. It is hard to master all the different kinds of financial activity that goes on in this world, so it is a great idea to restrict our trading activity to a currency pair which we understand, and with which we are familiar. Beginning with the trading of the currency of your nation can be a great idea. If that’s not your choice, sticking to the most liquid and widely traded pairs can also be an excellent practice for both the beginner and the advanced traders.

6. Do what you understand.

Simple as it is, failure to abide by this principle has been the doom of countless traders. In general, if you’re unsure that you know what you’re doing, and that you can defend your opinion with strength and vigor against critics that you value and trust, do not trade. Do not trade on the basis of hearsay or rumors. And do not act unless you’re confident that you understand both the positive consequences, and the adverse results that may result from opening a position.

7. Restrain your emotions.

Greed, excitement, euphoria, panic or fear should have no place in traders’ calculations. Yet traders are human beings, so it is obvious that we have to find a way of living with these emotions, while at the same time controlling them and minimizing their effect on our lives. That is why traders are always advised to begin with small amounts. By reducing our risk, we can be calm enough to realize our long term goals, reducing the impact of emotions on our trading choices. A logical approach and less emotional intensity are the best forex trading tips necessary for a successful career.

8. Take notes. Study your success and failure.

Take an analytical approach to trading. it does not begin at the fundamental and technical analysis of price trends, or the formulation of trading strategies. It begins at the first step taken into the career, with the first dollar placed in an open position, and the first mistakes in calculation and trading methods. The successful trader will keep a diary, a journal of his trading activity where he carefully scrutinizes his mistakes and successes to find out what works and what does not. This is one of the most importance forex trading tips that you will get from a good mentor.

9. Automate your trading as much as possible.

We already noted the importance of emotional control in ensuring a successful and profitable career. In order to minimize the role of emotions, one of the best of courses of action would be the automatization of trading choices and trader behavior. This is not about using forex robots, or buying expensive technical strategies. All that you need to do is to make sure that your responses to similar situations and trading scenarios are themselves similar in nature. In other words, don’t improvise. Let your reactions to market events follow a studied and tested pattern.

10. Do not rely on forex robots, wonder methods, and other snake oil products.

Surprisingly, these unproven and untested products are extremely popular these days, generating great profits for their sellers, but little in the way of gains for their excited and hopeful buyers. The logical defense against such magical items is in fact easy. If the genius creators of these tools are so smart, let them become millionaires with the benefit of their inventions. If they have no interest in doing as much, you should have no interest in their creations either.

11. Don’t go against the markets, unless you have enough patience and financial resilience to stick to a long term plan.

In general, a beginner is never advised to trade against trends, or to pick tops and bottoms by betting against the main forces of market momentum. Join the trends so that your mind can relax. Fight the trends, and constant stress and fear will wreck your career.

12. Understand that forex is about probabilities.

Forex is all about risk analysis and probability. There is no single method or style that will generate profits all the time. The key to success is positioning ourselves in such a way that the losses are harmless, while the profits are multiplied. Such a positioning is only possible by managing our risk allocations in accordance with an understanding of probability and risk management.

13. Study money management.

Once we make profits, it is time to protect them. Money management is about the minimization of losses, and maximization of profits. To ensure that you don’t gamble away your hard-earned profits, to “cut your losses short, and let profits ride”, you should keep the bible of money management as the centerpiece of your trading library at all times.

14. Study the markets, fundamentals, and technical factors leading the price action.

That we have placed this so low in the list should not surprise the experienced trader. Faulty analysis is rarely the cause of a wiped-out account. A career that fails to begin is never killed by the consequences of erronerous application or understanding of fundamental or technical studies. Other issues that are related to money management, and emotional control are far more important than analysis for the beginner, but as those issues are overcome, and steady gains are realized, the edge gained by successful analysis of the markets will be invaluable. Analysis is important, but only after a proper attitude to trading and risk taking is attained.

15. Don’t give up.

Finally, provided that you risk only what you can afford to lose, persistence, and a determination to succeed are great advantages. It is highly unlikely that you will become a trading genius overnight, so it is only sensible to await the ripening of your skills, and the development of your talents before giving up. As long as the learning process is painless, as long as the amounts that you risk do not derail your plans about the future and your life in general, the pains of the learning process will be harmless.

FUNDAMENTAL ANALYSIS

Fundamental analysis is a method that attempts to predict the intrinsic value of an investment. It is based on the theory that the market price of an asset tends to move towards its 'real value' or 'intrinsic value'.

Fundamental analysis in Forex entails predicting the price valuation of a currency and its market trends by analyzing current economic conditions, government policy and societal factors within a business cycle framework. Forex Traders gauge a country's economic state by examining macroeconomic indicators covering:

• Interest Rates Announcement
• Gross Domestic Product (GDP)
• Consumer Price Index (Inflation) and Spending Indicators
• Employment Indicators
• Retail Trade and Consumer Confidence
• Balance of Trade Surplus or Deficit
• Government Fiscal and Monetary Policy

 Fundamental Analysis Benefits

Determining the intrinsic value of an investment

Identifying long-term investment opportunities

Fundamental Analysis Drawbacks

Too many macroeconomic indicators and indicator can confuse novice investors

Macroeconomic indicators are statistics that indicate the current status of the economy of a state depending on a particular area of the economy (industry, labor market, trade, etc.). They are published regularly at a certain time by governmental agencies and the private sector. Capital One Forex provides an Economic Calendar for the dates of critical fundamental announcements and events. When properly used, these indicators can be an invaluable resource for any Forex trader.

In truth, these statistics help Forex traders monitor the economy's pulse; thus it is not surprising that these are religiously followed by almost everyone in the financial markets. After publication of these indicators we can observe volatility of the market. The degree of volatility is determined depending on the importance of an indicator. That is why it is important to understand which indicator is important and what it represents.

Interest Rates Announcement

Interest rates play the most important role in moving the prices of currencies in the foreign exchange market. As the institutions that set interest rates, central banks are therefore the most influential actors. Interest rates dictate flows of investment. Since currencies are the representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another. When central banks change interest rates they cause the forex market to experience movement and volatility. In the realm of Forex trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade.

Gross Domestic Product (GDP)

The GDP is the broadest measure of a country's economy, and it represents the total market value of all goods and services produced in a country during a given year. Since the GDP figure itself is often considered a lagging indicator, most traders focus on the two reports that are issued in the months before the final GDP figures: the advance report and the preliminary report. Significant revisions between these reports can cause considerable volatility.

Consumer Price Index

The Consumer Price Index (CPI) is probably the most crucial indicator of inflation. It represents changes in the level of retail prices for the basic consumer basket. Inflation is tied directly to the purchasing power of a currency within its borders and affects its standing on the international markets. If the economy develops in normal conditions, the increase in CPI can lead to an increase in basic interest rates. This, in turn, leads to an increase in the attractiveness of a currency.

Employment Indicators

Employment indicators reflect the overall health of an economy or business cycle. In order to understand how an economy is functioning, it is important to know how many jobs are being created or destructed, what percentage of the work force is actively working, and how many new people are claiming unemployment. For inflation measurement, it is also important to monitor the speed at which wages are growing.

Retail Sales

The retail sales indicator is released on a monthly basis and is important to the foreign exchange trader because it shows the overall strength of consumer spending and the success of retail stores. The report is particularly useful because it is a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables. It can be used to predict the performance of more important lagging indicators, and to assess the immediate direction of an economy.

Balance of Payments

The Balance of Payments represents the ratio between the amount of payments received from abroad and the amount of payments going abroad. In other words, it shows the total foreign trade operations, trade balance, and balance between export and import, transfer payments. If coming payment exceeds payments to other countries and international organizations the balance of payments is positive. The surplus is a favorable factor for growth of the national currency.

Government Fiscal and Monetary policy

Stabilization of the economy (e.g., full employment, control of inflation, and an equitable balance of payments) is one of the goals that governments attempt to achieve through manipulation of fiscal and monetary policies. Fiscal policy relates to taxes and expenditures, monetary policy to financial markets and the supply of credit, money, and other financial assets.

Conclusion: 

There are many economic indicators, and even more private reports that can be used to evaluate the fundamentals of forex. It's important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation's economy.