Fundamental analysis of the foreign exchange market

Fundamental analysis of the foreign exchange market
Changes in world currency rates, raw materials and minerals are related to a long list of events that affect the situation in a particular country and in the world. These could be economic or political changes or natural disasters. These events are considered when performing fundamental analysis. With an analytical view of history, it is possible to trace the interrelationship between the rotation of heads of large enterprises and heads of state, changes in the volume of production, with fluctuations in currency pairs and other assets.
What is the fundamental analysis based on?
What matters most to the trader is the possibility of making a profit by predicting the direction in which the chart of a financial instrument will take during the beginning / end of a specific event. Part of the analysis includes a history study that allows an assessment of volatility at the time the news is published, the direction of the trend when announcing values ​​higher or lower than expected.
The main principles on which fundamental market analysis is based :
  • Prices never change by themselves - there is always a reason.
  • The effect of various factors can be expected on price movement.
  • Correctly performed calculations of the dynamics of economic / political factors allow reliable judgment of future price changes.
  • Conditions of force majeure affect price fluctuations, but are difficult to predict.
Fundamental analysis of the forex market can be used both independently as well as in conjunction with technical analysis. As negative analysis of price movement may lead to serious complications such as early closing of open deals or activation of those orders, which the trader previously counted to bring him at least "zero", meaning no loss. There is an opinion that the news release temporarily violates the principles of technical analysis, so when trading on the basis of technical analysis, you should stop working with it and return to it only after the normal rhythm of fluctuations has returned.
Types of news affecting the market
To quickly understand what fundamental analysis is, you can use the economic events calendar on Alpari, where the most important events in the countries of the world are regularly reported. You must study how it affects the exchange rates or the prices of oil, metals and other assets separately, because no one will reveal the "secret". An easy way to solve the problem is to study the economic calendar and other sources for previous periods and note the actual price changes on the chart. Fundamental analysis requires possessing information about the real situation in the countries in which the trader plans to make money by trading in their national currency.
According to the degree of influence in the market, the news is divided into the following categories:
  • Low importance.
  • Medium.
  • High importance.
  • The events calendar can be used in fundamental analysis
    In practical terms, news has volatility at the time of publication, and has a planned, chaotic, or impulse movement that impedes the trading process. For this reason, trades may be closed prematurely and with a minimum profit, despite the activity of the Trailing Stop feature.
    On the other hand, the potential profit at the time of the news release is very attractive. But to make a guaranteed profit, you need to know the direction of the price movement. Here, fundamental analysis is indispensable. Profit can be obtained from any news, the main thing is to choose the right moment when opening a position. This approach will help you maximize profits and enter the market at the top, rather than in the middle of the process, as often happens when trading the news.
    Political factors that influence price changes
    The value of a country's national currency is affected by news of foreign and domestic policy. Therefore, instability weakens and depresses the currency. During presidential and parliamentary election periods, there may be fluctuations caused by rumors, often unconfirmed. In the opinion of experts, such situations are provoked on purpose, in order to use a temporary decrease or increase in prices to extract profit.
    Some political news does not significantly affect the market. For example, the position of a politician is already known, so at the time of the official publication of his speech, there will be no special fluctuations in prices. Sometimes traders are faced with factors that are unexpected for them, for example, a "posting of another opinion" and the subsequent interpretation "that everyone misunderstood them." Such a situation usually leads to an impulsive movement of asset prices, growth or decline, as well as a rapid return to what they were.
    The role of political news in trading is relatively minor. Forex fundamental analysis usually considers it an additional factor that has a greater impact on the long-term perspective, while short-term trading is performed on indicators of the economy.
    Economic factors
    The value of the national currency in comparison with the currencies of other countries depends on the economic situation in the country. When working with the leading currency pairs, the comparison is usually made with the US dollar, while in cross pairs, it is with other currencies, but the US dollar does not remain in the math. This relationship leads to the fact that the currency pair interacts, on the one hand, with any US news, and on the other hand, with events in the country in which the “second” currency of the pair is spread.
    The main indicators for each country are:
    • Data on employment. They are the level of unemployment, the amount of unemployment benefit, and the positive / negative dynamics of changes in these indicators. Employment in the industrial / agricultural sector is considered separately.
    • The trade balance, which shows the volume of its production, the volumes of imports and exports (a total indicator for all types of products).
    • Gross Domestic Product (GDP) - the total amount of goods produced in a country, services provided.
    • Changes in the policy of central banks in each country and the European Union.
    The peculiarity of the forex market lies in the fact that fundamental analysis must be performed simultaneously in several countries. The United States often acts as a key link in forecasting and sustaining further price action and trends. A country whose currency is included in the trading pair can provide a complementary or offsetting effect on price fluctuations.
    The effect of force majeure on prices
    All natural disasters (earthquakes, hurricanes, storms, droughts, floods) affect the market in an unexpected way. Partial help predicting its impact comes from meteorological news, but working on such calculations remains a huge risk. The same is true of technological disasters: where they are unpredictable in any way, and the trader will see the impact on the market "beyond the reality".
    It is easier to work with factors of a social nature, which include coups, military conflicts, revolutions, and strikes. Any general turmoil could lead to a depreciation of the national currency. Depending on the pair being traded, a trader can notice an increase or a decrease in the price. These changes can be predicted provided that the period of force majeure events is long-lasting.
    Rules for using the economic calendar
    One of the main tools for a forex trader who practices fundamental analysis is the economic calendar. It covers major world events in a country-by-country context (even those with minimal impact on the market). In the published list, historical and forecast indicators are indicated. For a trader, they have no value unless they have prediction made: will the forecast be confirmed? Or will the actual performance be better or worse? The economic table indicates the events to which we must pay special attention, and to the type of data that should be analyzed in the first place.
    When trading on the basis of the economic calendar, the key points are:
    • The higher the importance of the news, the higher the volatility of the pair is expected. In this case, it is difficult to trade market orders due to the high pressure on the broker's server, so it is advisable to enter the market in advance with the help of pending orders.
    • When taking a long-term approach to trading, one should pay attention to publications from central banks. Because through the analysis of the announced policies, one can predict the subsequent development of the financial situation in a particular country, an alliance of countries or the world as a whole.
    • As a result of a sound policy analysis, it is possible to make projections of the subsequent development of the financial situation in one country, which is a coalition of countries, in the world as a whole.
    • Great attention should be paid to expectations. If the just released data is better than expected, then currency value growth will be more likely. If the data maintains its values, then even "strong" news will not have a strong impact. 
    Fundamental analysis can be shortened by working with the economic calendar
    All events are shown in the economic calendar. When a trader selects one or a limited number of currency pairs, it is recommended to create a filter to hide the "unnecessary" countries. Therefore, when trading USDJPY , you can not focus on European news. Price fluctuations are affected by events in the United States of America and Asia.
    The impact of fundamental analysis on the technical
    Violent discussions about what to choose: a fundamental analysis or a technical analysis, usually turns into a decision to combine both options. Controlling support and resistance levels allows you to predict the probability of a trend change if the price breaks through a strong level when the news is published. Both fundamental and technical analysis methods can enhance the effectiveness of their use.
    The effect of the fundamental analysis of the foreign exchange market on the technologist is as follows:
    • News beats often shatter previously established patterns, drastically changing current trends. Traders who practice technical analysis, at these times usually only monitor changes in the market.
    • A large number of trading strategies are based on the correction produced after the news pulse. It is at these moments that the rules for technical analysis resume.
    • Fundamental factors take precedence over technical factors. If all the news is about the potential growth of a particular asset's value, the graphical picture may be incorrect (in the long run).
    The work on H4 and higher timeframes must necessarily incorporate elements of fundamental analysis. Whereas, without taking into account political and economic events, it is difficult to define the tasks of profit-taking in large quantities. If you look at the history, you will notice that there have been frequent returns to the starting point in short periods - several days, weeks.
    News trading strategies
    Trading in the Forex market, taking into account the economic / political news, is available in manual mode and with the help of automatic advisors. The latter, depending on the type of trading strategy, is set either to stop trading "near the news", or, on the contrary, to activate it. Preparing to open orders may include technical analysis, but depending on the trader's desire, it may be rejected in favor of the economic outlook.
    Trading on news has a number of features:
    • Usually, opening high-profit market positions is only possible on one pair. Navigating the charts and entering the market at the right time in several pairs can only be done with the help of advisors or a software script.
    • Pending orders are widely used. However, it is necessary to take into account the specificity of the opening at "first available price". Where the stronger the news, the greater the possibility of slippage, and this is normal.
    Traders who prefer trading based on fundamental forex analysis should follow experienced analysts. Thanks to such independent, unbiased analyzes, it becomes easier to understand what is going on in the market and current trends. This is due to the lack of time, or even the desire to understand everything on our own. Such an approach can provide high efficiency: “personal signals” are verified with information from relevant experts.

Post a Comment