There are two trading strategies. One strategy depends on fundamental analysis in trading forex. The second strategy depends on technical analysis in trading forex. Whether you use fundamental analysis or a technical analysis as a trading strategy, you should understand 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.
Choosing the right currency pair to trade is very important for you. USD is the most important currency and most probably you will be also trading USD most of the time. You should know that the release of certain economic data has significant and lasting impact on 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.
EURUSD is the most liquid pair in currency markets. The release of Nonfarm Payrolls (NFP) data on the first Friday of every month makes this pair and other pairs involving USD highly volatile.
Similarly, the release of US housing sales number every month has become very significant for USD in the recent years. Previously, forex markets used to give more importance to US Trade Balance.
If you are a range trader who likes to scalp for a few pips every trade, you should avoid trading on the day NFP data is released. Release of NFP figures makes the markets jittery and highly volatile.
However, as a breakout trader, understanding of which economic data is expected to be released can help you in your trading. You should plan your trades in accordance with the importance of the economic data to be released.
In nutshell, understanding that some economic indicators move the forex markets most is very important for you as a trader. It is also important for you to know which economic data the market deems most important at any point in time.
You should also understand which economic data causes knee jerk reaction in the currency markets and which pieces of economic data will have lasting reaction in the currency markets.