Hello!
Today I want to talk about a theme Seldom discussed, but important at the same time: the fundamental analysis of the foreign exchange market.
News, GDP, interest rates – all this affects the market and everyone should be able to understand it.
What is fundamental analysis
Forex fundamental analysis is a way of analyzing a currency, making predictions based on data that is not directly related to price charts.
There are two types of influence of fundamental indicators on the price:
- Short term. Fundamental information has an impact on the market in a matter of minutes or hours.
- Long term. Fundamental factors, whose impact on currencies lasts from 3 to 6 months. It is used for strategic positions.
Several basic levels are used to perform AF.
The level of the national economy. Comprehensive analysis of economic and political indicators of the country.
Industry. The volumes of supply and demand, prices, technologies, as well as production parameters are studied.
Single coin level. Financial statements, management technologies, business strategies, and the competitive environment are evaluated.
The classic scheme of fundamental analysis looks like this:
An analysis of the global financial markets, the presence of signs of crisis and events of force majeure, an examination of the situation in the economy and politics of the main world powers is carried out.
The economic indicators and the general level of stability of the region (industry), the analyzed currency or another instrument are evaluated.
The degree of influence of regional and world economic indicators on the dynamics of the selected financial instrument in the short and medium term is determined.
Main fundamental factors
When using FA directly to open trading positions, the following points will be decisive (in descending order of importance):
Central bank interest rates ( CB ).
Macroeconomic indicators.
Situations of force majeure, market rumours, news.
central bank rates
According to macroeconomics theory, rising interest rates cause currencies to rise in price, while falling interest rates make them cheaper. However, there are situations in the Forex market when a decrease in the rate becomes the reason for the strengthening of the currency.
Interventions in the foreign exchange market
Monetary interventions are an important tool in the analysis. Central Banks resort to such a measure very rarely, but you should not ignore this phenomenon.
Macroeconomic indicators
For any country without exception, there are data of constant importance:
the level of GDP;
rate of inflation;
balance of trade.
These reports are expected by the market. The proximity of their Publication dates give rise to a lot of rumors that fuel the commercial frenzy. Such an environment often creates situations where the publication of specific numbers does not cause almost no reaction as the market has already outperformed them beforehand. However, as FA practice shows, this happens only when the existing trend is not subject to change. In the event that the published data differs significantly from the forecast, the market response can be very violent. This is especially true at the time of the general reversal of the current trend.
Important macroeconomic indicators
In simple words, a macroeconomic indicator is expected that shows updated data of the main indices of the state’s financial and economic status.
The advantage is that each trader can know in advance the moment of publication of any data of the economic calendar.
These indicators affect the rate in the short term and are suitable for trading in medium and short terms.
Types of macroeconomic indicators
Balance of trade. This indicator reflects the volume of goods exported to those imported. It is called a positive balance when exports are higher than imports. It supposes a strengthening of the exchange rate, because the increase in exports increases the demand for the national currency of the exporting region.
National Bank discount rate. On its basis, interest rates on deposits and loans are formed. When the national bank rate rises, the currency strengthens; when it falls, it weakens.
Gross domestic product.
The volume of GDP is obtained by adding the entire range of services and goods that were produced in the country per capita. However, an increase in GDP always leads to the strengthening of the national currency against other currencies.
Inflation.
The growth of this indicator leads to the depreciation of the national currency.
Unemployment rate. As a general rule, an increase in the indicator is followed by a decrease in production, an increase in inflation, and a negative change in the trade balance. By it the unemployment data exerts strong pressure on currencies, and an increase in the figure causes a depreciation.
Macroeconomic indicators
One of the most common mistakes in trading is trying to trade on weak news. Therefore, you need to understand what data belongs to you.
Macroeconomic indicators
One of the most common mistakes in trading is trying to trade on weak news. Therefore, you need to understand which of the data is important.
Important market data includes:
money supply;
balance of payments deficit (Balance of Payment Deficit);
trade balance deficit (Balance of Trade Deficit);
unemployment rate (Unemployment rate);
a significant drop or increase in the rate of inflation (Rate of Inflation);
fluctuations in the volume of GDP;
change in key rates;
emergencies (natural disasters, unexpected events in politics or
Second stage of analysis
An evaluation of the numbers anticipated in the calendar for future data.
Analysis of the market reaction to this event. This is done to understand the price action in the news release. For example, when the exchange rate of a news-dependent currency grows steadily even before the figures are released and at the same time positive data is forecast, strong fluctuations in the exchange rate should not be expected at the time of the news. the publication of the report. information. And if the forecast turns out to be wrong, then the market can react with a powerful reversal of the current trend.
Take of decisions. There are two options to enter a trade. The first is to use the situation to open an order in the current trend before the news release with constant rolling stops to protect the position. The second is to wait for the data release and make trading decisions according to the situation.
Results
Fundamental indicators certainly affect the price, but each in its own way.
It is worth remembering this and not rushing to open a position just to see a news story.
Analyze, try to understand the possible reaction of the market to the news.
Use all the information, be objective and then you will be better than most.
Good luck!
Traders, if you liked this idea or if you have your own opinion about it, write in the comments. I’ll be happy
?