Fundamental Analysis. Its easy and it matters! This is what you do
- April 29, 2016
- Posted by: Roman Sadowski
- Category: Best Forex Blog on The Planet
How many times you opened your trading platform just to find the price moved unexpectedly in the direction you did not anticipate? You wondered why is that as your technical analysis suggested opposite outcome? It means only one thing:
There are other forces moving the price
You are not considering them
Fundamental analysis is the interpretation of statistical reports and economic indicators. Things like changes in interest rates, employment reports, and the latest inflation indicators all fall into the realm of fundamental analysis.
Forex traders must pay close attention to economic indicators which can have a direct – and to some degree, predictable – effect on the value of a nation’s currency in the forex market.
Given the impact these indicators can have on exchange rates, it is important to know beforehand when they are due for release. It is also likely that exchange rate spreads will widen during the time leading up to the release of an important indicator and this could add considerably to the cost of your trade.
Economic/financial and most political data is released at pre- defined times during the month and are in the online calendars often categorized as to have a high, medium or low impact on the value of its associated currency compared to others.
Risk events can ignite rapid price changes or spikes in most of currency pairs.
For particularly large movements to occur, Madult.net the actual figure must “surprise” the market by coming out at notable discrepancy from market expectations. Close correlations do not have the same impact as the market will have already priced the forecasted value.
If you could correctly predict and then capture the resulting price trends created by fundamental data, it would be very a profitable exercise for the long term.
Establishing the longer-term trend is escort bayan the first and most important piece of the puzzle. Fundamental analysis needs to be a part of any successful trading strategy. You will need it to get your mid to long term outlook on the currency you trade. Fundamental analysis tends to scare novice traders away. It appears to be too difficult to grasp. They often discount it.
This is wrong! Don’t discount it
No matter how trivial it may seem, rus escort SUPPLY AND DEMAND determine the price. It might be partly driven by emotions or rationale but after all – the volume of orders will decide which way the price will go. Supply and demand is a basic principle in economics illustrated in the chart below. The higher the price (Y axis) the less the commodity is demanded (X axis).
Successful traders have a full picture of the long-term currency outlook. Traders position their portfolios in the long run based on macro analysis and Central Bank’s monetary policies. Understanding the basics of the market and its biggest influencers will help you improve the probabilities of success and will ensure that you are on the right side of the market. This is also very helpful during short term fluctuations where the price tends to revert from the mean and might spook inexperienced traders. You will be better poised to interpret the current market situation and predict where it could be headed if you study macro analysis and Central Banks’ outlook regarding policy and economics developments.
The best example of this is the downtrend in EURUSD illustrated below
The aggressive sell off in this market wasn’t a function of stochastic being overbought or moving average crossover and anything else like that. It was purely a function of divergence in monetary policy between ECB and FED. At the beginning of 2014 FED completed “Taper” policy. In short, FED stopped to inflate US Dollar and began a conversation about tightening monetary policy. This is very bullish for US Dollar At the same time, ECB announced expansionary policy to improve macro conditions in Europe. This is very bearish for Euro. The result was – EURUSD dropping like the was no bottom until early 2015. Fundamental analysis also involves analyzing data sets that provide a view into a country’s economy. Economics conditions force Central Banks to stimulate that economy via interest rates and money inflation. Interest rates give incentive for investment. Capital flow impacts demand on the given currency and the price moves.
You need to know if you are bullish or bearish in the market you trade and you need to know why.
The reason? Many traders think that price is a function of technical patterns but in fact regardless of what the chart shows, price is a function of supply and demand. It’s a result of the volume of orders being placed on either side of the market.
The volume of orders is influenced by many fundamental factors and financial incentives like a shift in monetary and fiscal policy, changes in the inflation rate, manufacturing and employment growth.
- It will give you a quick idea of what is going on.
- It will help you with your longer-term view point on the markets you follow.
- It will help you to form your bias about the currencies you trade.
- It will keep you away from those days when the volatility might stop you out.
Having a core knowledge of macroeconomics concepts is essential in forex trading. Long term price changes in money markets are a direct function of monetary policy and money flow across the markets. It should be part of your trading plan.
Fundamental analysis is not hard. It’s fun and interesting!
Many traders don’t pay attention to this part and are likely to fail in the long term.
Beginners, in particular, seriously overestimate their abilities in dealing with fundamental events, believing that they can successfully predict their outcomes.
Fundamental data releases can sometimes produce dramatic price movements for currency pairs. The resulting changes can persist for some time, giving traders the impression that the market is on a run. However, this is no reason to enter trades, especially if you do not understand fully what is happening. Unfortunately, many beginners do exactly this.
As you may now have grasped, all investors should be very wary of events because of the risks that are associated with this type of event. The idea seems obvious from the beginning. If you could learn to interpret these news events, you could do very well.
You simply need to take the right approach.
Invest some time in grasping the essences of all macroeconomics concepts. The most important are:
- Interest rates
Equip yourself with the foresight that’s vital for successful trading with a long-term perspective.
Ensure that, not only you understand these concepts, but also you know how that data is reported to the markets on weekly basis and how does it impact every currency. Always know what is the market expecting from the incoming data, this will drive prices in short and long term.
I keep a simple journal with all my economic indicators and track them on weekly basis. Would you be bullish or bearish on Euro in April and coming May if you looked at the table below?
Obviously, you would have no doubt that the Eurozone economy is improving vastly. You would also know that inflation is still lagging well behind ECB’s target and it will influence Drahi’s policies. You would also know when the next major risk events will be released.
Humbletraders subscribers have a full access to a weekly risk event analysis to track all indicators that move the price. We watch around 20 per each currency.
Let’s see what Euro did in April against USD;
It moved from 1.0550 to 1.0900
Did you know that SERVICES PMI (UK) tends to move GBPUSD by 80 pips on Average EVERY TIME?
Did you know that USD fell every time FED raised interest rates?
Did you know that market reacts more to Average Earnings than NFP?
Did you know that USDJPY has been lower for the first 2-3 months of each year EVERY YEAR!
Important indicators and events you need to be looking at per currency:
Indicators: GDP, CPI, NFP, Average Earnings, PMI, Retail Sales
Events: FOMC, FED Officials speeches
Indicators: GDP, CPI, Average Earnings, Employment, Services PMI
Events: BOE meetings
Indicators: GDP, CPI, ZEW Economic Sentiment
Events: ECB monetary policy meetings, Drahi’s speeches
Indicators: GDP, CPI, GDT
Events: RBNZ Monetary Policy Meetings
Indicators: GDP, CPI, Employment
Events: RBA Monetary Policy Meeting.
There is a lot of information out there but it all gets very complicated. I advise you buy and read THIS BOOK ( any edition will do, my is from 2009 and its great!)
Visit the resources below on a regular basis:
FOREX FACTORY CALENDAR – Weekly market Risk Events updated daily.
FED WATCH – Measures probability of the FED raising interest rates. Higher % suggest higher probability of the FED rising interest rates at the next FOMC meeting.
JARRATT DAVIS Weekly video – 10 min video published every Sunday/Monday wrapping important risk events for the week ahead.
COMMITMENTS OF TRADERS – Smart money positions in futures markets. Tracks what speculators are doing in the futures markets. Impacts cash market directly.
Below is the market analysis I read every day. These are quick, snappy and rich in information articles. Sign up to these newsletters. Print and read every day.
It’s important that you take a few minutes every day to check what’s in the calendar and what it means for the positions you currently hold or those you are thinking to take.
It does matter!