There are only two responses that traders give when asked about fundamental economic events and how they affect their trading. The first belongs to the purely technical trader who says that the market has already priced in the fundamental factors and you should only look at the long term trend, your existing chart patterns and search for the right point to enter the market. However, the fundamental traders acknowledges the need for technical analysis but will not make an entry into the market without understanding why the market is going move in the direction the indicators are pointing.
Technical analysis, much like most indicators, is a lagging predictor. The few indicators that do offer a small window into the future are still based on historical patterns and events that have happened or are currently happening. Technical analysis is a barometer of the market and can only offer a taste of what may occur. Many traders use technical analysis to gauge the way the wind is blowing and then make their trades. Strict fundamental traders are much the same as they stick their head in the sand and make sure moves based on current economic theory; regardless of the number of times those “sure” moves have cost them money.
The combination of technical and fundamental analysis provides a much clearer picture of what is actually occurring in the marketplace. Technical traders who do not look at the economic forecasts may find themselves stuck in long term losing trades based on technical indicators that do not pick up the changing tide. Just as strictly fundamental traders miss opportunities to make money on shorter time frames based on the patterns of history.
Fundamental economic news can relate to almost anything that happens in the country of the underlying currency. Elections, political infighting, labor strikes, war and employment statistics all play a factor in how strong or weak a particular currency will be in the coming hours, days and weeks. For instance, as the price of gold rises the AUD becomes stronger since a large part of their economy is based on gold mining and export. However, as the balance begins to move the AUD begins to level off because prices and inflation begin to rise offsetting the strength that was earlier posed. Fundamental traders see these patterns happen while technical traders hang on to their trades and wait for the change in the weather before moving the other direction often getting hung out to dry on a market top.
In conclusion, no trader is able to work in a vacuum and all long-term successful traders find ways to to filter economic data and news releases through their systems, as well as provide for time to study technical information. Economic news releases often make the currency markets very volatile for hours after their release while slowly filtering news such as elections may take weeks to show their effect on the market. Market indicators will always lag behind when they are based on historical data, however finding a way to view them through the eyes of economic news releases can provide you with a way to profit from your Forex trading that you may have never seen before.
The causes of currency pair movements, lie not in the charts of technical traders, but in the workings of the countries themselves. The movements are caused by interest rates changes, manufacturing numbers, employment statistics and the current political climate. To study events that surround certain currencies and to correlate those events to the price movements of the currencies, in known as fundamental analysis. This type of analysis can make astute traders and investors in the Forex market, a lot of money. However, most currency traders look at only the short term news and how it affects the current technical charts, instead of looking for a long term trend that can send their profits over the top.
In an effort to explain this process, we are going to look at the movement of the Canadian dollar from approximately 1994 until the year 2006. During this period of time the USD continued to strengthen against the CAD until it reached record highs of $1.6 to 1 during the strong economic run the US had during that time. The monthly charts show a most consistent upward trend for the 12 year time frame. This trend even though it saw the dot com bubble burst and the events that started the wars in the Afghanistan and Iraq, the US economy continued to strengthen.
In early 2003, as finance experts in the US had just begun to clamor about the housing bubble, world markets took another view of the USD/CAD currency pair and noted that prices and inflation had been growing in the US and that US residents had begun to look to their northern neighbors to purchase items because of the disparity in the currency prices. At this point buying in Canada for a US resident was like getting everything at a 50% discount. Fundamental traders took note and in less than 3 years, the gains of the previous 12 years had been wiped out.
Fundamental traders were able to capitalize on a 3,000 pip move before ever seeing a short retracement of less than 800 pips. Monthly traders and long term investors in currency made millions of dollars by watching the economic essentials of another country.
This short study of the CAD in no way implies that this could happen again in other smaller currencies, but the reality is that it does happen and it happens with enough frequency that fundamental traders make millions of dollars every year. Fundamental trading requires a much longer view of the market and it also requires much deeper trading pockets. Where many Forex day and swing traders are unable to sustain a 50 to 100 pip loss, fundamental traders routinely have stops set at 500 pips or more.
In conclusion, the strengths of Canada shone brightly in this study. Her ability to allow oil reserves to be exploited and sold on the open market, fewer pharmaceutical regulations and a consistent desire to open new trade, allowed her to take advantage of her southern neighbor and while suffering for a short time, has rebounded into a strong economic power once again. Learning to capitalize on the fundamental news of a nation can make you very rich. However, just being aware of what is going on beyond the 24 hour news cycle can produce better profits in your short term trading.
Macroeconomics, as the label implies, is considered the study of business economics over a massive scale, using a national or international basis for study. It has been developed into a separate principle from microeconomics, predominantly because of the work of the celebrated economist John Maynard Keynes, who postulated among other considerations; that short-run variances in commercial activity are often mitigated, simply by the appropriate use of fiscal policy. This has been in marked difference to conventional economic principles, which claim the theory of monetary neutrality, which says that minor factors like the money supply cannot have an impact on actual variables, like productivity or unemployment.
It is a good idea to understand how and why Keynes, together with other economic theorists who followed him, arrived at many of these findings and it is also a good idea to look at precisely what data exists to back up the theory. It is even more important to understand and examine what modifications to fiscal and monetary policies that governing bodies and central banks ought to embrace, if any, in an effort to reduce the side effects of what is considered to be the natural business cycle.
In case you are asking yourself just what exactly any of this has to do with Forex trading, you may well be astonished that even in the current speculation-driven marketplace, real-money generally flows, according to basic economic factors and are still the most crucial element in determining the general value of foreign currencies. In addition, as soon as macroeconomics is comprehended, it really is simpler for any currency trader to follow global financial information and central bank lingo. The key point is, that a functioning familiarity with economics is a crucial tool should a currency trader have any sort of desire to carrying out fundamental analysis.
There exists an on-going debate among technical and fundamental analysts involving retail Forex traders. In essence, very few traders at this particular stage comprehend what either of these forms of analysis genuinely indicates. There exists a belief that fundamental analysis consists of merely reading through Bloomberg news reports (or comparable reports), when in fact, listening to the experts is merely consuming another person’s fundamental analysis, and quite often hardly any data is offered to support the expert findings. There is not any research being carried out by the Forex trader him/herself. Inside the cloudy world of financial and economic evaluation, there exists a bull for each and every bear while information, as well as facts, remain tricky to find. Views from the “industry experts” are generally contrary to each other, and they have to be – otherwise there would be virtually no marketplace, no individual to sell if everybody is buying, and without anyone to buy if everyone is selling.
For this reason, fundamental analysis may be an extremely useful strategy, once you know what you are doing, and this is the reason why you need at least an elementary familiarity with economics. In order to profit from this knowledge you need to locate a view or event that is not really being expressed in the public forums by simply performing all of your personal research into the underlying financial numbers, and make use of the ideas you uncover to make money, which, after all, is the name of the game.
In conclusion, it is highly recommended that you understand how and why Keynes, together with other economic theorists who followed him, arrived at his findings and it is also a good idea to look at precisely what data exists to back up his theory. It is even more important to understand and examine what modifications to fiscal and monetary policies that governing bodies and central banks ought to embrace, if any, in an effort to reduce the side effects of what is considered to be the natural business cycle. In order to profit from the knowledge that you gain from understanding all this, you will need to locate a view or event that is not really being expressed in the public forums, by performing your own personal research into underlying financial numbers. You also need to make use of the ideas you uncover, so that you can make some money out of those ideas.
As soon as you seriously consider Forex currency trading, fundamental analysis should come to mind. Fundamental analysis describes variables that have an impact on the value of a currency exchange pair. It is essential not just to conduct technical analysis according to your charts and indicators, but also to keep in mind any macroeconomic events which could impact the value of a currency pair. Learning the characteristics of the major world currencies is extremely helpful when you first begin to trade. Regardless of which pair or pairs you decide to trade, understanding their properties is incredibly beneficial because it assists you in becoming more accurate in each trade that you execute.
The euro (EUR) is a particular currency that is reasonably new in terms of currency trading, as it only commenced dealing in the late 90s; however the EUR/USD pair is easily the most bought and sold pair in the Forex market. For this reason, the EUR/USD is extremely liquid. The euro is significantly impacted by interest rates. For anyone interested in trading the EUR/USD pair, it is important to observe the Euribor (Europe’s three-month interest rate), to observe any variations in investor tendencies when trading the EUR/USD pair because the USD and euro rates have an effect on one another. The EUR/USD is definitely a favored pair due to the numerous opportunities it provides for prospective trades.
The Japanese yen (JPY) from Japan, is another major currency. Japan is considered the most significant overall economy found in East Asia; therefore, the yen is commonly used as an alternative currency that represents the economy of the entire Pacific Rim. Whenever there are difficulties within the neighboring nations, the yen may well decline in value. The Bank of Japan is known for intervening with the currency markets to protect the value of the yen in times of crises. Yet another factor influencing the yen is the general strength of their financial sector.
The British pound (GBP) is another major currency and this one is from the United Kingdom. This particular currency is extremely important to observe since the UK has one of the most significant economies on the planet. The pound is impacted by energy and oil prices. When they climb, the pound often strengthens.
Swiss franc (CHF) is a major currency from Switzerland. The Swiss franc is recognized as an investor’s refuge during times of uncertainty and doubt. Because Switzerland’s financial institutions manage a great deal of the world’s wealth, any specific reports of bank or investment company mergers, and/or weak revenues directly impact the valuation of the franc.
The commodity currencies are the Canadian, Australian, and New Zealand dollars. Considering that commodities comprise the vast majority of Canada’s exports, typically the currency will strengthen or weaken based on these prices. Normally the USD and CAD trend in a similar direction since most of Canada’s exports are typically distributed in the US.
The Australian dollar (AUD), is a major currency from Australia. The Australian dollar is usually associated with gold price levels. The interest rate differential is considered mainly because it will act as a guide for the long-term pattern.
The New Zealand dollar (NZD) from New Zealand, is another major currency. The New Zealand dollar is related to commodity price levels like the Canadian dollar. Additionally it is directly associated with the Australian dollar, which means they are able to work as options for one another.
In conclusion, it is important to build a storehouse of knowledge concerning the tendencies of each pair that you intend to trade as well as the impact that each of them has on the other. Currencies do not operate in a vacuum and so world events that affect one currency may well have an effect on another.
Fundamental analysis is important for traders and investors in the Forex market. This type of analysis is used to judge particular trades and investments. This type of analysis can be very effective in Forex trading and allows you to assess whether or not a particular opportunity has a potential for profit, through both economic and political indicators. Not only that, but fundamental analysis can also be used to seek out and avoid potentially bad investments, which can often prove to be useful.
Fundamental analysis is one of two main types of analysis – the other one being technical analysis. Technical analysis involves following trends and patterns from the past to the present, using charts and graphs, as well as predicting future trends and patterns. Both fundamental analysis and technical analysis in Forex trading tend to go hand in hand. If you don’t use any type of analysis, you are essentially trading blind. Similarly though, if you only use one type of analysis, you are essentially trading half-blind. This is why really, fundamental analysis and technical analysis are both equally important, in Forex trading.
Fundamental analysis encompasses economic indicators as well as political ones, which includes world events and news announcements. Because the currency market much like other financial markets, is based on mass psychology and the collective minds of the people operating within it. This is why fundamental analysis is so important, because events and announcements can directly impact the minds of the people within the FX market. Currencies don’t actually go up in down in value because of how well or bad they are doing or going to do in the future, but because of how well or bad traders and investors in the Forex market think they are going to do in the future. If you want to be successful in the currency market, you are going to have to be willing to follow the crowd and constantly anticipate where the crowd is going to move next.
In conclusion, fundamental analysis is important in Forex trading. Although you might prefer to use or be better at conducting a particular type of analysis, both fundamental and technical analysis go hand in hand and you shouldn’t forget either of them. If you prefer to use technical analysis more, working with charts and graphs, still ensure that you stay up-to-date with the latest events and news announcements, particularly the ones surrounding the countries of the currencies you are working with. Remember that world events and news announcements can also have a big impact on the FX market, so consider staying up-to-date with global events and news announcements too. Fundamental analysis doesn’t have to be difficult to use and conduct either: there are many different sources of news available for free, as well as many different services and calendars, also available for free. You just need to be willing to look for what you need, in Forex trading as an individual trader or investor, as you are fully responsible for how much success you experience. Do not underestimate the use of fundamental analysis, as it could help to increase your Forex trading profits.
Global currencies move in trends, however, these trends are not isolated events and their movements are not irrespective of other currencies in the Forex market. While currency is traded in pairs such as the EUR/USD, these pairs are affected by events that affect other currencies at the same time. It is important to be aware of these situations in order to avoid losing trades in good markets. While beginning investor often never see the correlation, seasoned traders often miss fundamental issues when they become too involved with technical charts.
Most small traders develop all of their strategies on pure technical analysis; however, elementary fundamental analysis of the market cannot be overlooked. An overall view of the market allows the trader to see political, social and industrial news as trading events. While individual events and individuals do not make much of an impact, the timing of news events and the release of economic news does have an effect on the entire market.
The old seafaring notion that a rising tide raises every ship works just as well in the currency markets. Nevertheless, when one currency in a pair rises, its trading partner suffers an equal decrease. But in markets where currencies are closely related, such as the case of the EUR and GBP, if the GBP has a significant move against the USD then this will certainly have an upward effect on the EUR against the USD since the EUR and the GBP are so closely related. This movement in an ancillary currency is called currency correlation.
This means that when you are evaluating a trade you must take into account any related currency and what is happening in its market as well. The CAD is closely tied to the USD because of the close physical relationship of the countries but also because of significant trade relationships. The CAD will move in tandem with the USD except when pair with it. As a country Canada does not like this relationship but as for their economy it works to their advantage. When the US offers good economic news the CAD tends to move up along with the USD. But because of its independent trading agreements with other countries, bad economic news does not have an equal response.
Every day small investors are not equipped to monitor the movement of hundreds of world currencies, but they can keep track of world events, breaking news and major financial announcements. News is released immediately during the 24 hour news cycle we have today. It does not require waiting until the evening news or the morning newspaper to be aware of breaking conditions. If you go away from your trading platform for any length of time it makes sense to come back and do a quick check of the major breaking news. This news may save you from making a huge mistake based on market spikes.
In conclusion, markets never move in isolation of one another. A spike in one currency may cause a spike in another currency while a drop in one may not cause a corresponding drop in another market. It all depends on the relationship between the two countries and the weight of the news that is presented. Pay attention to the fundamental game and you can hold your losses to a minimum and let your profits run.