Forex Market Fundamental Analysis
Price changes in world currencies, raw materials and metals are generally triggered by events that affect the situation in several countries and throughout the world. These events can be economic or political changes and natural disasters. This is what is taken into account in fundamental analysis. Historical facts have also recorded a link between the change of leadership of large companies, heads of state and changes in production volume with fluctuations in currency pairs or other assets.
Fundamental Principles of Fundamental Analysis
A fundamentalist trader is more oriented to profit opportunities by basing his predictions on charts of asset movements that develop in the setting of certain events. Fundamental analysis requires historical data in order to take into account volatility when an important event occurs or to predict the direction of the trend when a central bank decision is announced or when there is a difference in actual numbers with the consensus.
The following are the basic principles of fundamental analysis:
- Prices never change without triggers.
- The influence of the factors that drive prices can be predicted.
- Appropriate calculations made regarding price dynamics due to economic/political factors can help determine the continuation of price movements in an authentic manner.
- All rational events that cannot be anticipated can affect price fluctuations, but this is almost unpredictable.
Fundamental analysis of the Forex market can be used independently or simultaneously with technical analysis. So that a bad prediction of the continuation of price movements can lead to a closing position or fixation on orders that traders previously assumed (at least) break even. According to some opinions, the announcement of economic news for a certain period of time can disrupt the principles of technical analysis, so that any trade that relies on technical analysis should be delayed first, and can be active again when price fluctuations return to a more natural rhythm.
Various News Affecting the Market
In order to more easily understand the fundamental analysis, use the economic calendar on the Alpari site, where all important news from all countries is released regularly. When the news seems to begin to affect currency exchange rates, the price of oil, metal or other assets, it is necessary to study it independently in order to obtain more comprehensive information. The easiest way to solve this problem is to review the economic calendar, or other sources for the previous period and record the actual price changes on the chart. Fundamental analysis requires an actual source of information about the situation that develops in countries whose national currency is to be used as a trading tool.
The level of news influence on the market is divided into:
- Less important ( Low ).
- Medium ( Medium ).
- Important ( High ).
In practice, the news is varied by the level of volatility at the time of its release, as well as by systematic or random movements that have the potential to hamper the trade process. This diversity can determine the closing conditions of the transaction, which can be done earlier and with a low profit regardless of the performance of the Trailing Stop feature.
On the other hand, the potential profit in high market volatility is very large. But to guarantee the profit, it is necessary to accurately predict the direction of price movements, and this is where the role of fundamental analysis is needed. Profit can be generated on any news background, the most important is the right in choosing the order opening time. This approach will be very helpful in generating large profits, by entering the market to the top, not during the process.
Political Factors Affecting Price Changes
The national currency value of a country can be influenced by various political news from within and outside the country. Therefore, political instability can depress the currency and weaken it. Throughout the period of presidential or parliamentary elections, price fluctuations can be triggered by any political issue. According to the opinions of some experts, such a situation is usually provoked intentionally to create opportunities through price reductions or increases.
Not all political news can affect the market significantly. For example, the speech of a politician that has been predicted in advance may not significantly shatter prices. Sometimes traders are also faced with unexpected situations, for example, “different decision announcements” and clarification comments that read “there is a misunderstanding”. Such a situation could lead to a decline or increase in asset prices, including impulsivity reversal of direction to the previous position.
The role of political news in trade is relatively small. In fundamental analysis, the presence of political news is considered a complementary factor that has an important impact only on a long-term perspective, while for short-term trading, economic indicators are more likely to be relied on.
The level of the national currency relative to the currencies of other countries depends on the economic position of the country. The ratio between currency pairs, both with and without dollar involvement ( cross pair ) will still use the dollar in the calculation. This indicates that there is a correlation between the currency pair’s response to economic news from the US on one side, and on the other hand reacts to news from the country of origin of the second currency in its partner.
The main indicators (economy) of each country that must be considered include:
- Employment information, which includes unemployment and unemployment claims, along with changes in indicators. In addition, there is also a labor force participation rate in the industrial/agricultural sector.
- Trade balance, which shows industry volume, the balance between exports and imports (gross indicator for all types of products).
- Gross Domestic Product (PBD), which is the total amount of goods and services produced in a country.
- Changes to the monetary policies of the central banks of each state or union.
The very specific character of the Forex market makes fundamental analysis must be carried out simultaneously in several countries. The US often acts as a key element in analyzing the continuation of price movements, including the emergence and potential direction of trends. Countries whose currencies are traded in a pair can provide complementary or balancing effects on price fluctuations.
Effect of Force Majeure on Price
All natural disasters (earthquakes, hurricanes, tornadoes, droughts, floods) can affect the market in unpredictable formats. Some predictions can indeed be helped by meteorological news, but this is still considered risky. The same thing applies to human or technological disasters. All such disasters cannot be predicted by any method, and traders can only see their impact on the market after the fact (disaster) occurs.
Social factors such as coups, military conflicts, revolutions, work strikes are still easier to learn. Public riots can trigger a decline in national currency values. Traders can observe an increase or decrease in price through a related currency in a traded pair. Longer duration of force majeure tends to be more easily utilized in predicting price changes.
Rules for the Use of Economic Calendar
One means that traders use in applying fundamental analysis is the economic calendar. This calendar provides important economic information from every country in the world, including information that might not have a strong impact on the Forex market. On each announcement schedule, historical indicators and forecasts are always included. The most important indicator for a trader is that according to the forecast, whether it is better or worse than the previous number.
The economic calendar identifies various world events that are deemed worthy of special attention and shows data that must be analyzed first.
The following are some important points to consider when using the economic calendar:
- The higher the influence of the news, the higher the prediction of volatility. In conditions like this, transactions with various market orders will be difficult due to the swift flow to the broker’s server, so it is recommended to use pending orders when entering the market.
- If it is oriented to long-term trading, it is recommended to anticipate the reports of central banks. Decisions regarding monetary policy often contain clues to the development of the country’s financial situation, intergovernmental organizations and globally.
- More attention is focused on forecast indicators. If the newly released data turns out to be better than expected, then the value of the related currency in the near future is believed to strengthen. However, if the reading of the indicator does not change, even from important events, the market swing will not occur.
All important information is presented in the economic calendar. If you choose one or several pairs to trade, the trader can create a filter to filter the country that is needed. So, when trading USDJPY pairs, for example, a list of news from the European region can be eliminated, because price fluctuations will be affected only by news from the US and Asia alone.
Effect of Fundamental Analysis of Technical Analysis
The debate about the choice of analysis, between fundamental and technical, ends in the end with the use of both analyzes. Control over support and resistance levels allows predicting potential trend changes if prices break through the strongest level when economic indicators are released. The interaction between fundamental and technical analysis can mutually enhance the effectiveness of its use.
The influence of fundamental analysis on technology can be classified as follows:
- News impulses often damage the price patterns that are formed, and significantly change the trend that is developing. Traders who apply technical analysis at moments like this usually only observe the changes.
- The number of trading strategies is mostly based on corrections that generally appear after important news is released. At this moment the approach to technical analysis became volatile.
- Fundamental factors take precedence over technical factors. If all news indicates a potential increase in an asset, technical charts can provide a wrong pattern (in the long run).
If the transaction is more oriented to the H4 time interval (4 hours) or longer, it is better to put forward a fundamental analysis. Without political and economic elements, the target of obtaining profits will be more difficult to determine. History records, it is not uncommon to find a price reversal in a short period of time, usually occurring in a few days or even a week.
News Trading Strategy
Trading on the Forex market by considering economic/political news can be done alone or with the help of automated advisors. For the last option, it is necessary to adjust the strategy used, whether it’s before the news release, or after it. Furthermore, the preparation of opening orders is done by relying on technical analysis, but can also take into account the existing economic projections.
News Trading has several characteristics, including:
- Manual opening of market orders with high-profit potential is usually available only to currency pairs. If you use several instruments, then you need to use the advisor/script to enter the market.
- The application of pending orders is very diverse. Therefore, just understand the main character, namely opening at the first available price. The more important news is released, the higher the possibility of slippage happening, and this is a common condition.
For traders who prefer to transact by relying on fundamental analysis, it is advisable to read various types of Forex analysis from experts so that it can be easier to position themselves on the developing trend. Moreover, the time is very limited, not to mention the understanding of everything that should be understood. This approach can be considered effective because all indications can be confirmed by the information provided by experts.