Forex Investment Strategies

By: Mel Joelle

Making an investment in the foreign exchange (forex) market requires a detailed knowledge of current economic and geopolitical conditions of the countries whose currencies are being traded. According to the currency website XE, there are 175 currencies worldwide. Each belongs to a country with a unique geopolitical, cultural and economic history. Currency traders have to focus on only a few currencies out of necessity. They cannot possibly pay attention to all of the global currencies at once. When deciding when and what currency to invest in, the two main techniques of stock investing, fundamental and technical analysis, also apply to forex trading.

Fundamental Analysis

This may seem odd, since fundamental analysis focuses on the basic conditions of a company issuing a particular stock. There is no such thing as a balance sheet for an entire country. Traders using fundamental analysis must focus on the conditions that are appropriate when valuing currencies. These conditions are communicated by economic indicators, such as the inflation rate, Gross Domestic Product growth rate, industrial production and interest rates. Interest rates are a particularly important indicator to keep an eye on because a currency with rising interest rates is attractive to speculators executing carry trades. High-rate currencies tend to be stronger relative to other currencies.

Gross Domestic Product (GDP) is the other important indicator to follow. Strong GDP growth rates are associated with stronger currencies, and weak GDP growth rates are associated with weaker currencies. The level of speculative volatility in forex markets grows and peaks with the release of economic data reports. Traders may wish to pay attention to the inflation rate along with the GDP growth rate. If the inflation rate is too high, it may mean that the GDP growth rate is largely illusory. The central bank may raise interest rates to curb inflation, which will likely raise the value of the currency in question in the eyes of traders.

Technical Analysis

Technical analysis has somewhat of a bad reputation. Many professional investors have a low opinion of technical analysis. This technique looks at past currency movements under different market conditions and attempts to divine principles that can be brought forward into the present. Applied to current market conditions, technical analysts attempt to identify profitable entry and exit points based on the mathematical breakdown of particular movements. Plenty of technical analysts have lost money because their analysis did not match up with reality.

Also known as technicians, technical analysts organize their data into charts. They use the ups and downs to make educated guesses about future price movements and set their trades accordingly. Charts created by technical analysis are vulnerable to unexpected shocks in the global economy. Rising inflation, falling GDP, rising interest rates and lower industrial production can emerge from a combination of factors. The monster 9.0 Japan earthquake in March 2011 sent shockwaves rippling through supply lines the world over. The forex market reacted quickly, sending the Japanese yen skyrocketing, prompting a massive intervention by world central banks to keep the yen weak.

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