To become a successful trader on the forex, stock or any other financial or commodities market, it is vital you have a strong knowledge of the world economy. Improving your understanding of the economies of particular regions, nations, how they work and any strengths and weaknesses can help you become a much more successful trader.
Becoming a trading expert isn’t something that just happens overnight though. Increasing your knowledge about the world economy will take a lot of time and studying, especially if your current knowledge is limited. In the long run, if you’re serious about improving your trading and even making it a full-time job, working to broaden your knowledge is a necessity.
There are many ways changes and events in the world economy affect markets and present numerous opportunities to make profitable trades. This article explains how and why it is important to know about the world economy and ways to improve your knowledge.
How Global Events Affect the Forex Market
There are three main types of events which can affect the forex market; political events, natural disasters and war.
It is important to keep up to date with the changing political landscape in countries whose currency you trade. This could be a specific nation and its currency like Norway and the Krone, or the currency of a region such as the euro and what is going on with Greece, Italy or any other of its members.
Elections are key events which impact upon a currency, as the uncertainty beforehand can see its value weaken, while when a new president/prime minister is appointed and the situation stabilises it can strengthen. Following the pre-election polls and then the policies of whichever party is elected can help you make decisions of whether to buy or sell currency.
Natural disasters are hard to predict but they will still affect a nation or region’s currency. The fallout can be extremely expensive as a lot of money will be put towards rebuilding along with a decrease in tourism and consumer spending as the currency value drops. It can present a good opportunity to buy into the currency if a recovery is predicted so you can buy low and sell high.
War can be predicted more than natural disasters and along with having a devastating effect on the country it usually does to its currency as well. There can be economic upsides, especially after a war ends, but it is a risk to invest during such times. Keep tabs on countries that always seem to be on the edge of war, whether civil or with neighbours, such as Ukraine, Russia, others in Eastern Europe and the Middle East.
Differences to Know Across the World Economy
Due to cultural, historical and political differences in countries across the world, different trends can be spotted. It is important to stay up to date with the financial situation and mood in various regions, some which can be partly predictable and others which can’t.
The USA is one of the most powerful nations in the world and its economy has a far reaching impact across the world. When the global financial crash happened it was one of the major players but has recovered well in recent years. Many of the other largest financial nations in the world are dependent on the US for trade as it easily has the largest trade deficit in the world. They need the US in order to grow so any weaknesses it experiences have significant knock-on effects.
China has been one of the fastest growing economies in the world for a few years now but took the extraordinary steps of devaluing its own currency, the Yuan, in August 2015. Less affected by the global economic crash, it is now experiencing more of a bumpy ride and holds a more unpredictable future. Due to its size and history a lot of its neighbours in Asia rely on China for their own strong economies, so if its currency value drops theirs are likely to as well.
The euro is the official currency of the Eurozone, used in 19 countries, the second largest reserve currency and second most traded one in the world after the US dollar. It has experienced various ups and downs, with Greece close to exiting, high unemployment and other issues. With some key elections, referendums and still elements of uncertainty remaining, it looks to continue fluctuating.
Methods and Resources for Improving Your Knowledge
There are various ways to improve your knowledge of the world economy, whatever it is you hope to trade. A number of useful books for reading up on the history, current trends and for further information about global finances exist. These are a few of the best:
- A Farewell to Alms: A Brief Economic History of the World – Gregory Clark: Catch up with this ‘concise’ history.
- Guns, Germs and Steel – Jared Diamond: Explains how Europe came to dominate global economics.
- Globalizing Capital: A History of the International Monetary System: Understand the classical gold standard and Bretton Woods regime.
The internet is of course a great resource for keeping up to date with global economic events and increasing your knowledge of all areas. There are numerous websites you can follow and videos online that explain elements of the global economy in basic and more complex ways.
When you intend to begin trading then choose a platform that includes up to date information, chart and graph applications and more. Many can be set so that you receive notifications as soon as important changes occur in the world’s economy that could affect the price of certain currencies. If you’re still stuck for ideas then try going abroad and trading currencies, as this will be a quick way to increase your knowledge by actually getting involved.
Whatever you hope to trade, hopefully you now realise how important having at least a decent knowledge of the global economy is to become a successful trader and can use some of this advice to make it a reality.