There are two types of forex traders. One type of traders depends on fundamental analysis in trading forex. The second type of traders depends on technical analysis in trading forex. Whether you are a fundamental trader or a technical trader, you should not underestimate the importance of economic data in shaping trading strategies.
Over 90 percent of currency transactions are done against USD. USD is either the base currency or the counter currency in most of the currency trades.
Since majority of the currency trades involve USD, you as a forex trader will also most probably trade USD most of the time. Release of certain economic data has significant and lasting impact on currencies like USD.
With experience, you will understand that currency markets reaction to the release of different economic data with time also changes. A few years back, US GDP figures used to be important for USD but they dont have much impact now.
EUR/USD is the most liquid pair in the forex market and is heavily traded. The release of Nonfarm Payrolls (NFP) data on the first Friday of each month has become important in recent years. These figures makes EUR/USD and other pairs involving US Dollar highly volatile for some time until the markets digest the importance of these figures.
Similarly, a few years back the release of US housing sales number every month was not important for the currency markets. But it has become very significant for USD in the recent years. Currency markets used to give more importance to US Trade Balance in the past but they dont react to these figures much now.
If you depend on range trading as a trading strategy, you should avoid the day NFP data is released for trading. This is a highly volatile and jittery day for the forex market.
However, if you are a breakout trader, the knowledge of which economic data is expected to be released can help you in determining the size and confidence of the trade.
In brief, knowledge that certain economic indicators make the forex markets move most is important for you as a trader. It is also important for you to know that particular economic data, the market considers most important at any point in time.
Knowledge of which economic data causes knee jerk reaction in the currency markets and which economic data usually has lasting reaction in the currency markets is also important for your trading success.
