Forex Market Fundamental Analysis
Changes in prices in world currencies, raw materials and metals are generally triggered by events that influence. These events can take the form of economic or political changes and natural disasters. This is taken into account in fundamental analysis. Historical facts have also recorded a link between the change of leadership of a large company, the head of state. Or changes in production volume with fluctuations in currency pairs or other assets.
Basic Principles of Fundamental Analysis
Forex traders who use fundamental analysis, of course, are more oriented towards short-term and long-term benefits. By basing its predictions on the chart of asset movements that develop on the background of certain events. Fundamental analysis requires historical data to calculate volatility when important events occur.
Following are the basic principles of fundamental analysis:
- Prices never change without a trigger.
- The influence of the factors that drive prices can be predicted.
- Precise calculations made regarding price dynamics due to economic / political factors can help determine the continuation of authentic price movements.
- Any rational event that cannot be anticipated can affect price fluctuations, but this is almost unpredictable.
Fundamental analysis of the Forex market
Fundamental financial analysis can be used independently or simultaneously with technical analysis. So that poor predictions of continued price movements can lead to closing positions. Or to fixation on orders that traders previously assumed (at least) break even. According to some opinions, announcing economic news for a certain period of time can disrupt the principle of technical analysis. So that every trade that relies on technical analysis should be postponed first. And it can be active again when price fluctuations return to more reasonable rhythms.
Types of News Affecting the Market
In order to more easily understand fundamental analysis, use the economic calendar. There all important news from all countries is released regularly. When the news appears to be affecting the currency exchange rates, prices of oil, metals or other assets. Then you need 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 changes in the actual price on the chart. Fundamental analysis requires the actual source of information. Information about situations that develop in countries where the national currency is to be used as a trading tool.
The level of influence of news on the market can be divided into:
- Less important ( Low ).
- Medium ( Medium ).
- Important ( High ).
In practice, news is varied by the level of volatility at the time of its release, as well as by systematic movements. Or is it random that has the potential to hinder the trade process. This diversity can determine the conditions for closing transactions. Which can be done earlier and with lower profits regardless of the performance of the Trailing Stop feature.
On the other hand, the potential for profits at high market volatility is very large. But to guarantee that profit needs to accurately predict the direction of price movements. This is where the role of fundamental analysis is needed. Profit can be generated on any news background, the most important thing is right in choosing the order opening time. This approach will be very helpful in making large profits. By entering the market to the top, not during the process.
Political Factors Affecting Price Changes
The value of a country’s national currency can be influenced by various political news from within and outside the country. Therefore, political instability can suppress the currency and weaken it. Throughout the presidential or parliamentary election period. Price fluctuations can also be triggered by any political issue. In the opinion of some experts, such situations are usually deliberately provoked to create opportunities through price reductions or increases.
Not all political news can significantly affect the market. For example, the speech of a politician who had been predicted previously might not significantly shake prices. Sometimes traders are also faced with unexpected situations. For example, “different decision announcements” and clarification comments that say “there is a misunderstanding”. This situation can lead to a decrease or increase in asset prices, including a reversal of direction to the previous position impulsively.
The role of political news
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. As for short-term trading, economic indicators are more likely to be relied upon.
The value of the national currency relative to other currencies depends on the economic position of the country. The ratio between currency pairs ( pair ), 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 response of the currency pair on economic news from the US on the one hand, and on the other hand reacts to the news from the country of origin of the second currency in the pair.
The main (economic) indicators 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 the industrial volume, balance between exports and imports (gross indicator for all types of products).
- Gross Domestic Product (GDP), which is the total number of goods and services produced in a country.
- Changes in the central bank’s monetary policy from each state or its union.
The very specific character of the Forex market makes fundamental analysis must be done simultaneously for several countries. The US often acts as a key element in analyzing the continuation of price movements, including the emergence and potential direction of trend developments. Countries whose currencies are traded in a pair can provide complementary effects or a counterweight to price fluctuations.
Effect of Force Majeure on Price
All natural disasters (earthquakes, hurricanes, tornadoes, droughts, floods) can affect the market in an unpredictable format. Some predictions can indeed be helped by meteorological news, but this is still relatively risky. The same thing applies to human-caused 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) has occurred.
Social factors such as coups, military conflicts, revolutions, work strikes are still easier to learn. Public riots can trigger a decline in the value of the national currency. Traders can observe increases or decreases in prices through related currencies in traded pairs . The longer duration of force majeure tends to be more easily utilized in predicting price changes.
Rules of Use of the Economic Calendar
One of the tools 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 traders is that which matches the forecast, whether it’s better or worse than the previous figure.
The economic calendar identifies various world events that are considered worthy of special attention, and shows data that must be analyzed first.
The economic calendar
The following are some important points that need to be considered when using the economic calendar:
- The higher the influence of the news, the higher the volatility predictions. In market conditions like this, transactions with various market orders will be difficult. This is due to the swift flow to the broker server, so you should use pending orders when entering the forex market.
- If you are oriented to long-term trading, you should anticipate reports from central banks. These decisions regarding monetary policy often contain clues to the development of the state’s financial situation, intergovernmental and global organizations.
- More attention is focused on forecast indicators. If the newly released data turns out to be better than predicted, then the value of the related currency in the near future is believed to be strengthening. However, if the indicator reading does not change, even from an important event, then the swing in the market will not occur.
All important information will be presented in the economic calendar. If you choose one or several pairs to trade. As a forex trader, you can create filters to filter out the countries you need. So, when trading a USDJPY pair for example. Then you can remove the list of news from the European region. Because price fluctuations will be affected only by news from the US and Asia.
Effect of Fundamental Analysis on Technical Analysis
Debate about the choice of analysis, between fundamental and technical, the ends always end with the use of both analyzes. Control of support and resistance levels makes it possible to predict potential trend changes if prices break the strongest level when economic indicators are released. Interactions between fundamental and technical analysis can enhance the effectiveness of their use.
The influence of fundamental technical analysis can be classified as follows:
- News impulses often undermine the pattern of prices formed, and significantly change emerging trends. Traders who apply technical analysis at such moments usually only observe the changes.
- The number of trading strategies is based largely on corrections that generally appear after important news is released. At this moment the approach to technical analysis has changed.
- 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 at the time interval H4 (4 hours) or longer, it is better to set up fundamental analysis. Without political and economic elements, the profit target will be more difficult to determine. History notes, it is not uncommon to find price reversals in a short period of time, usually occurring within a few days or even a week.
News Trading Strategy
Trade on the Forex market taking into account economic and political news. This can be done alone or with the help of an automated forex advisor. For the last option you need to adjust the strategy used. Whether it’s before the news release, or after. Furthermore, preparation for opening an order is done by relying on technical analysis. But it can also take into account existing economic projections.
News Trading has several characteristics, including:
- Manually opening market orders with high profit potential is usually available only on currency pairs . If you use several instruments, you need to use advisors / scripts 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 crowded important news is released, the higher the likelihood of slippage occurring, and this is a condition that is already common.
For traders who prefer to transact by relying on fundamental analysis, it is advisable to read various kinds of Forex analysis from experts so that it can be easier to position themselves on a growing trend. Moreover, the time is very limited, not to mention the understanding of everything that really should be understood. This approach can be considered effective, because all indications can be confirmed by information provided by experts.