The movement in the Forex market is set by
fundamental factors. These are the key macroeconomic indicators of the
state of the national economy that affect the participants in the Forex market
and the level of exchange rates. These are the factors that fundamental
analysis studies.
Information about the discount rates of central banks, the economic
course of the government, possible changes in the political life of the
country, as well as all kinds of rumors and expectations are the most important
in fundamental analysis.
Definition
If you, opening a trading platform, want to see the whole market picture
as a whole, you need to add fundamental analysis tools to your arsenal. It
is based not only on monitoring the schedule, but also on tracking global
economic and political events.
A key referendum, a presidential commentary, or the publication of
negative statistics on the country can drastically affect the exchange rate of
the national currency.
Economic, political, and even seasonal factors are inextricably linked
to trading, and their regular study and use to determine future price values
is called fundamental analysis.
The purpose of fundamental analysis
Each trader needs to figure out exactly how economic events and
indicators affect quotes, and how to build their own forecasts using this data.
It can often be seen that traders, even experienced ones, believe that
since they are scalping, opening dozens of fast trades during the day, they do
not need to know anything about the global situation. And you don't have
to open the Economic Calendar.
However, this is fundamentally wrong: any changes that you did not have
time (or did not want) to pay attention to can negatively affect even
short-term trading. The purpose of fundamental analysis is to help the
trader prepare for unexpected price changes by understanding the reason why it
is happening. And it is, as a rule, external.
What events are taken into account when conducting fundamental analysis?
§ economic,
geopolitical and social phenomena;
§ economic prospects
and general market sentiment in relation to a particular country;
§ natural disasters
(extreme weather conditions, earthquakes and hurricanes that cause serious
damage);
§ wars and periods of
conflicts between countries;
§ political events
(presidential elections, referendums, forums);
§ publishing
important statistics (economic indicators) by industry or country.
Fundamentals of fundamental analysis
Trading is a game of expectations and global relationships. It is
this law that lies in the practical foundations of fundamental analysis.
Let's give an example of such a chain of dominoes. Oil prices
affect the inflation rate in the region. Inflation changes - traders
immediately start waiting for the central bank to change the level of interest
rates.
When Brent fell from $ 100 to $ 30 a few years ago, it shocked financial
markets. Although with a lag of a couple of months, inflation eased
significantly across the world, and key central banks have noticeably changed
their course of policy within a few weeks: from willingness to raise rates, to
pause in rate hikes or new programs to support markets.
All this was done so that the economies of the largest countries would
not be swept by deflation (a steady decline in prices for goods and services),
which subsequently runs the risk of triggering an economic depression.
Why is deflation bad? Excessive cheapening of goods leads to a
financial deficit, lack of the necessary amount of funds in the economy and
holes in the national budget. It turns out that the country begins to lack
money not only for development, but also to cover vital costs.
Fundamental
Analysis Subject
All actions in the
financial market have an economic cause and effect. Fundamental analysis
studies the relationship and influence of macroeconomic, geopolitical,
and regional factors, as well as any legal and monetary actions on the rate
of a financial asset (currency, raw materials, stocks, liabilities).
Also, the scope of
fundamental analysis includes the assessment of statistical data, the political
situation, the state of all types of resources, analysis of the likelihood of
various kinds of force majeure situations and forecasts of further development.
The most important thing is that it is the foundation that most correctly
allows assessing the alignment of large market players' forces and allows a
small player to safely "swim alongside sharks".
The foundation
"sees in the market" already today what any chart will show only
tomorrow? then technical analysis can work with the price to make the
calculations required to open positions. If you correctly (and on time!)
Analyze the fundamental events occurring today "behind the chart",
then tomorrow the result of your technical analysis will be much more reliable.
Fundamental Analysis Objectives
The standard task is to make an optimal forecast of price movement and make a profit , and this requires an effective search and analysis of factors that may affect this. The result of fundamental analysis: determining the future fair price of a trading asset (or group) and developing a methodology for achieving it.
It is the market balance of supply / demand that directly affects the price of an asset: if (from the point of view of the foundation) the current price deviates from the "fair" market price - higher or lower, then the asset is considered, respectively, overbought or oversold and must move towards reaching the balance level calculated level.
We remind you that this
is how large players move the price , creating a market imbalance with their
huge volumes (mainly pending positions), after which a lot of small players
move in a certain direction. Show us the intentions of market makers in time is
the main goal of fundamental analysis.
Impact
of fundamental analysis on the market
We think globally: it is a comprehensive assessment of indicators that is important to us. No single information should be the only signal for making a trading decision.
Note that the fundamental
analysis will be correct only if the country operates in a market economy, that
is, government regulation and pressure on the economy is minimal. The
opposite example: the economy of modern China, in which all external and
internal factors, including official statistics, are strictly controlled by the
government, practically defies standard analysis. At the same time,
China's influence on the Asian region is enormous, but it cannot be predicted;
it makes sense to evaluate only the actual data.
- Long-term impact: affects the global or
national economy over a period of several months to several years. As a
rule, these are structural, monetary, industrial factors, such as the
dynamics of inflation, unemployment and interest rates, the state of raw
materials, as well as long-term statistics (quarter, year). This forecast
is used to open and maintain strategic positions.
- Short-term impact: limited to a period
from several minutes to several days (political news, short - term Forex
statistics , negative comments, etc.). The result of the analysis is used
to open and hold trades from М15 to 24 hours.
The structure of fundamental analysis
The process
should move from the global level to the finer, from complex data to simpler
ones.
The following structural levels are distinguished for
carrying out FA:
1.
National: a comprehensive political and economic analysis
of the country's state, financial, raw materials and industrial resources.
2.
Sectoral: features of the formation of supply/demand,
prices, technologies and production parameters.
3.
Level of global companies (product, index, security): assessment of
business strategies and competitive environment, analysis of financial
statements, management systems.
Any fundamental analysis is relative. You can create a
convenient scheme yourself, but we can offer a classic version:
- Global (long-term)
analysis of markets (of various types), the likelihood of a crisis or
force majeure, political and economic "background" in leading
countries.
- Medium-term (regional,
sectoral) analysis of economic indicators and the level of stability of
the country (region, industry) with which a particular asset is associated.
- The pressure of
global and regional factors on
the medium and short-term dynamics of the selected asset.
Fundamental analysis methods
Standard statistical techniques are commonly used:
Comparison method
In the mass of macroeconomic indicators, the most
significant (for example, GDP, industrial production, unemployment, interest
rate) are determined that seriously affect the market dynamics, and then these
values are compared according to various criteria: regions, countries,
assets, periods. Further, their dynamics is projected onto the exchange rate,
raw materials, energy prices in order to fulfill the forecast of indicators.
For example a comprehensive assessment of the impact of statistics from leading
EU countries on the EUR exchange rate.
Induction / deduction method
Recall that induction is a strategy of averaging and
reducing to a single indicator of many different factors for the overall
result. In the financial market, it is used to assess the chances of a trend
line continuation. For example "Beige Book" or quarterly reports of
companies.
The deduction is an assessment of the causal relationship
of historical data, that is, the search for factors that the market has yet to
work out. Used to assess the chances of a trend reversal. For example the
influence of a commodity asset on the dynamics of a currency pair.
Correlation method
Forecast of the dynamics of a group of assets based on
the analysis of mutual relationships (direct or reverse). The correlation can
be calculated independently, but we recommend using special services on
information sites, where the calculation is performed automatically in
real-time. For example the correlation of the Canadian dollar with oil or the
Australian dollar with spot gold.
Grouping and generalization
method
Diversified assets (currency, raw materials) are
compiled, for which index indicators are calculated. The dynamics of the index
is considered a priority for all assets in this information block. For example,
the famous S & P500, below on the screen - the dynamics of its components.
Seasonality
method
The impact of regular natural factors,
seasonal economic indicators (for example, weather conditions, seasonal
employment, increase or decrease in energy demand, increase in consumer
spending on holidays), regular currency exchange for tax payments during
financial reporting periods, and seasonal reporting of commodity companies are
studied. And the manufacturing sector.
Force majeure in fundamental analysis
Any unexpected disasters in nature and
society actively affect the economy, and the financial market is one of the
first to react. You should not miss such opportunities for making money: a
trader needs to assess this reaction in time and determine the safest and, if
possible, profitable trading strategy for himself. Today, the most powerful
force majeure events are:
Any unexpected disasters in nature and
society actively affect the economy, and the financial market is one of the
first to react. You should not miss such opportunities for making money: a
trader needs to assess this reaction in time and determine the safest and, if
possible, profitable trading strategy for himself. Today, the most powerful
force majeure events are:
Military conflicts
The main thing is to identify the
parties to the conflict correctly: for the aggressor country, as a rule, this
situation is more beneficial and has a positive effect on the currency. Also,
against the backdrop of conflicts, active speculation in raw materials and
energy resources begins.
Natural disasters, human-made disasters
They negatively affect the exchange rate
of the affected country's national currency (region), speculatively rise in
prices for industrial raw materials and energy resources, which gives an
excellent reason for fast trading. Even if the data on the scale of losses
(destruction, the number of victims) are exaggerated, or the problem is removed
due to central banks' interventions, such a trend will quickly unfold, and
speculators who reacted in time can again earn money.
Political instability
Elections, coups, technical defaults,
resignations of senior officials - even a hint of such problems negatively
affect the national currency and major stocks, as well as goods and resources
supplied by the conflict country. Even the consequences of a completely
expected event, such as Brexit, cannot be calculated by the market using
technical analysis methods and does not have time to develop a general reaction.
If you are planning to trade in a
situation of force majeure, make sure that all your market trading orders are
correctly executed by your broker (without slippage, "loss" of
quotes, low liquidity, incorrect prices) and, if necessary, you can quickly fix
a speculative deal.
Main data
sources
So, for a complete fundamental picture, we need:
- official
statistics and economic data;
- public
information (including unofficial) of state and financial authorities,
national banks;
- information
from news and analytical agencies;
- analytical
publications of leading economic publications;
- speeches and
comments of officials, heads of financial departments, analysts,
politicians, representatives of big business;
- sectoral
reporting and forecasts for the development of the most important sectors
of the economy;
- corporate
reporting and analytical data of large companies;
- any
information (financial or political) that can be used as an insider.
In traders' slang, such information is
usually called "news" - its main volume is indeed regulated in time,
but a significant part of the data, especially analytics, will have to be
searched for independently.
News indicator
A common technical
trading tool, fundamental and technical analysis in the financial market,
allows you to set up filters, but it gives only data without analysis,
comments, and recommendations. It is usually offered either as an informer in a
trading terminal or as a special service on analytical sites. It processes data
from multiple servers, so the efficiency of such information is questionable.
Information on the broker's website
It is used by those who do not plan to study the
intricacies of fundamental analysis and is offered, as a rule, already with an
assessment of the situation and recommendations. Naturally - it is late.
Therefore it is suitable only for general analysis and not for making a trading
decision.
Financial news and analytics
Economic calendar
The most popular form of submission of regulated
information: they contain a list of statistical data (indicating the official
source), a filter system, a publication schedule with previous values and an
official forecast. The calendar conducts information processing and the initial
assessment of their impact on the market in real time.
We remind you that any news source (free or commercial) that you plan to use as a provider of information must ensure that the data is prompt and accurate in a format convenient for you.
Rumors in fundamental analysis
Market
"rumors" in the financial market are considered to be some
unofficial, most often unverified, information that can cause a speculative
reaction and a shift in current price levels. This is the traditional method of
manipulation to create a trading buzz that makes the big players profit and the
small ones go broke. At such moments, the price moves against any logic and can
break even long-term trends, but most often, having collected easy money from
“amateurs”, market makers return the price to a convenient technical range.
We check any
information many times and be sure to hedge the positions opened on
"rumors" so that when the actual information appears, you can exit
the deal with minimal losses.
When is fundamental analysis ineffective?
You need to understand that not every event can cause a
strong price movement, and any information needs to be assessed
comprehensively. For example:
- The
"news" was not strong enough for the current trend to react.
- Several
events occur simultaneously, the influence of which is mutually
compensated. For example, the release of weakly positive European
indicators will have a much smaller impact on the EUR / USD pair than the
data on the decline in US inflation.
- There are
other fundamental factors on the market that you did not consider - not
all information is available to you. Not all of you have time to
process—for example, purchases of dollar stock by large corporations for
their local purposes.
- You are using
false or deliberately false data - absolutely independent sources of
information do not exist.
- You
misinterpreted the available data and made an incorrect forecast.
It is
advisable to confirm signals of fundamental news by technical analysis.
Therefore, for a reliable entry into the market on speculative news, Stop Loss
must be set. With a successful entry, we follow the development of the
situation using traditional indicators.
Conclusions
Many different factors simultaneously act on the current
price, and the same events (or data) in different conditions will cause
different reactions - and this is the main problem of using the foundation in
real trading. The ability to analyze Intermarket relationships that can effect
changes in the price rate, the ability to “read between the lines” of any
information requires a lot of effort and comes only with experience.
Any technical analysis processes only past data, and the
future of the market is shaped by economics and politics. Even with a proven
technical strategy, you cannot ignore the fundamental analysis process - it is
dangerous for your deposit. Otherwise, this market will quietly ignore you.
