Trade Balance Definition

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Video Transcription:

Hello traders. Welcome to the news trading course and the third module, “News that moves the market profitably enough for us to trade.” In this lesson, I’m going to go through the trade balance. First of all, we’re going to define it, and then I’m going to show you why this event is so important, and why it can be so profitable to trade.

Let’s start by defining what the trade balance is. It’s pretty simple. The trade balance is the difference in value between imported and exported goods and services. The more a country imports, the less it produces, so the lower its GDP is. You can see that everything is connected. The trade balance is directly connected to the GDP. This is why the trade balance is very important figure for currency traders. A positive number indicates that more goods and services were exported than imported.

Trade Balance Definition

Now, here’s where I need you guys to pay attention, because this is what’s important about the trade balance. A positive number means that more goods and services were exported than imported. This means that the countries or the nations production of goods and services that was exported, is bigger than what was imported. This means that this nation is more self-sufficient than a nation that imported more than what it exported.

So an increasing in export, is directly linked to an increase in the value of a currency, because foreigners must buy the domestic currency to pay for the nation exports. This is why the trade balance is so important for us, for currency traders, for Forex traders, because the more a country exports, the more valuable its currency is going to be, because nations that buy its exports, have to buy its currency to pay for those exports. On the other hand, an increase in imports is negatively correlated with the value of a currency, because nationals have to buy foreign currency to pay for those imports. If a country imports more than what it exports, this country is on the other side of the trade balance. Meaning that this country has to use its currency to buy foreign currencies to pay for those imports. The currency of this country will depreciate. This is why the trade balance is so important.

Trade Balance Explained

A better than forecasted number, will bring immediate Bullish Pressure for the currency. A worse than expected number, will bring the value of the currency down. If we have a green number, we are going to look to buy this currency, and if we have a red number, we are going to look to sell it. When I’m talking about buying and selling, I’m talking about the immediate trade, because we are trading the news. We are trading the immediate increasing volume in the market and we are trading just the events momentum.

Now, imports and exports are very important for the dynamics of a nation’s economy. The less the nation imports, the more self-sufficient it is. Now, a trade deficit represents an outflow of domestic currency to foreign markets, and a trade deficit is when a country imports more than what it exports. So there’s an outflow of domestic currency to foreign markets. This is why the currency of this country will depreciate.

Now, a trade surplus, this is when a country exports more than what it imports, represents an inflow of domestic currency from foreign markets, because foreigners have to buy the currency to pay for those exports. Now that I have explained this to you, it’s pretty simple. The more a country imports, the more it bleeds its domestic currency to foreign markets. The more it exports, the more it receives domestic currency from foreign markets. How are we going to trade this event? First of all, we are never going to front run the news, ever. The trade balance will bring high volatility to the markets in very clean moves, so we are going to use both buy-stops and sell-stops to get feel of the base prices.

Remember that we use these pending orders because we are not as fast as price action, and if we try to buy and sell at market once the event or the number is out, we are going to get failed on the very bad levels. So we are going to use pending orders but if a correction occurs, we will ignore it because of the moment of the trade. We will not ignore consolidations to our precision, though. So, if we get failed on the short side, for example, and we get a correction back to our initial levels we are going to ignore it. But if price continues to drop and then starts to consolidate because of initial profit taken, we are going to trade that consolidation and add to our precision, only if we are far enough from our targets.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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