Forex market investors utilize two main types of analysis to place their trades – technical analysis and fundamental analysis. Technical analysis looks at currency rate fluctuations during a given time (via charts), while fundamental analysis utilizes a variety of economic indicators (i.e. Gross Domestic Product, interest rates, retail sales, and the Consumer Price Index (CPI)). Each indicator is important in helping to make that trade decision, but the Gross Domestic Product (GDP) is one of the stronger economic indicators. If a country’s GDP is rises, chances are the exchange rate will increase; if the GDP falls, then a country’s exchange rate might drop.Defining the Gross Domestic Product

The Gross Domestic Product (GDP) is the total amount of good and services produced within a nation’s border. Prior to the early 1990’s, the main tool to assess the total amount of movement of goods and services for the United States was through the Gross National Product (GNP). Since the early 1990’s, however, the GDP has been the tool of choice since other countries use that same standard. The difference between the two figures is that the GNP also includes goods and services produced outside the United States. If a product will be produced in South America, for example, the profits arising from that product would be included in the GNP (but not in the GDP).

Calculating the GDP

Three main approaches exist for calculating the GDP – the expenditure approach, the income approach, and the product approach. Each approach leads to the same figure but through a different calculation. The expenditure approach, which assesses the total amount of expenditures, is calculated using four main components: personal consumption (durable and non-durable goods and services); investments (fixed assets and inventories); government purchases (schools, roads, etc.); and net exports (exports minus imports).

Here’s how the formula actually appears:

GDP = Consumption (C) + Investments (I) + Government purchases (G) + Net exports (NE).

Releasing of data

The Department of Commerce releases GDP reports on a quarterly basis. These reports are considered lagging indictors (as opposed to leading indicators), since the data is a summary of past events. Even so, the GDP numbers are important in predicting trends in a country’s economy, which can affect a country’s exchange rate.

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Forex market is the largest market in the world and that your broker or institution that you are trading with is collecting quotes from a centralized feed or individual quotes comprising of interbank rates.

Symbols

Currencies are traded in pairs and are each assigned a symbol. For the Japanese Yen it is JPY, for the Pounds Sterling it is GBP, for Euro it is EUR and for the Swiss Frank it is CHF. So, EUR/USD would be Euro-Dollar pair. GBP/USD would be pounds Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pair and so on. And the first currency quoted is called the base currency.

Spread and Pip

When you see Forex quotes you will actually see two numbers. The first number is called the bid and the second number is called the offer (sometimes called the ASK). If we use the EUR/USD as an example you might see 1.5778/1.5780 the first number 1.5778 is the bid price and is the price traders are prepared to buy Euros against the USD Dollar. The second number 1.5780 is the offer price and is the price traders are prepared to sell the Euro against the US Dollar. That means that 1 Euro = 1.5578 US Dollars.

These quotes are sometimes abbreviated to the last two digits of the currency such as 78/80. Each broker has its own convention and some will quote the full number and others will show only the last two. You will also notice that there is a difference between the bid and the offer price and that is called the spread. For the four major currencies the spread is normally 2 - 5 give or take a pip.

The most common increment of currencies is the PIP. If the EUR/USD moves from 1.5778 to 1.5779 that is one Pip. A pip is the last decimal place of a quotation. The Pip or POINT as it is sometimes referred to depending on context is how we will measure our profit or loss.

Example JPY rate of 104.92 (notice the JPY only goes to two decimal places, most of the other currencies have four decimal places) In the case of the JPY 1 pip would be .01 therefore. So if USDJPY move one pip, so it will become 104.93/104.91.

Currency Value

As each currency has its own value it is necessary to calculate the value of a pip for that particular currency. We also want a constant so we will assume that we want to convert everything to US Dollars. In currencies where the US Dollar is quoted first the calculation would be as follows.

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