Any kind of work has its essential foundation. Trading is no exception.
Fundamental analysis is a must-have for any successful trader. It primarily aims to track any factors that drive the market movement. All prices are a reflection of supply and demand hinging on countries’ economic variables and political sentiments. Even the weather (floods, tsunamis, etc.) impacts an asset value, let alone wars and pandemics. By analyzing news and predicting its impact on the markets, you lay the foundation for your successful trading.
And it doesn’t really matter what time frame a trader chooses. Even scalping requires fundamental analysis. Therefore, profitable news trading is seen as aerobatics. That’s why we’re going to explore the main things any trader needs to know about fundamental analysis to make money in the markets.
1. Three Principles of Fundamental Analysis
2. Fundamental or Technical Analysis: Which One Is Better
3. Economic Calendar
4. Economic Data
5. Political Factors
6. Force Majeure
7. News Trading Strategies
Fundamental analysis in Forex, stock, and commodity markets is based on the same general principles.
Even if it seems that prices fluctuate unpredictably, that’s not exactly true.
Any market asset value doesn’t change for the sake of it: something does the job. And the analysis aims to find out what external factors cause the price to rise and drop.
The market routinely reacts to repeated actions, so you can predict how a particular fundamental factor will impact an asset price.
Here’s an example. When the central bank’s base interest rate goes up, the national currency typically strengthens, while geopolitical conflicts in the Gulf countries almost always make oil prices rise.
Economic data that impact asset prices are published regularly. Moreover, traders can get them in advance.
Some political factors, such as elections, can be predicted as well. By contrast, force majeure happens unexpectedly, but it has the strongest impact on the market.
Traders who are accustomed to using fundamental analysis are sure that it’s impossible to correctly assess the market environment and make a correct forecast if you don’t understand all external factors.
Those who prefer technical analysis disagree as they believe that the price considers all of the factors, so you just need to keep track of the chart to predict price movements. Now, who’s right?
The truth lies somewhere in between. During calm periods, technical analysis—patterns and indicators—really work better. But important news throws the market off, so you’d better hit pause on the use of technical analysis and consider switching to fundamental analysis.
Also, you can mix these two types of analysis for more efficient trading in financial markets.
The key tool for fundamental analysis is the economic calendar. It lists all important and relevant economic data from around the world.
1. Date and time when a particular event will be published.
2. Market asset to be impacted by the event.
3. Event to take place at the specified time.
4. Volatility to expect at this point.
5. Actual, predicted, and previous values.
No calendar will tell you exactly how the event will impact the price, though. This means that traders are solely responsible for forecasting trends.
Do you need to pay attention to all of the news? You don’t, otherwise, you’d have to spend the whole day stuck in front of your computer, as data is released almost every hour.
All news is divided into three categories according to their importance:
Weak news implies some indicators that don’t have any major impact on the market behavior.
Medium news can cause a temporary increase in market volatility and must be factored in.
The third category is about the most important data. It can redirect the trend, allowing you to snatch maximum profits.
Different calendars show the importance of news differently. This can be stars (one, two, or three) or colors (green, yellow, and red).
Using an economic calendar poses no major difficulty as long as you stick to the rules:
1. The strongest news causes the greatest volatility, so there are a lot of people who are willing to profit off of it. When it’s released, the broker’s server experiences high loads, so you’d better open a pending order beforehand rather than enter at market price.
2. If your strategy is medium- or long-term, be sure to pay attention to central banks’ interest rate policies. Raising or decreasing rates has a lasting impact on the economy of a country or even the world.
3. Experienced traders often enter the market before or right after a news release. Newbies should consider waiting it out to avoid unnecessary risks.
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As the financial market is closely linked to global economic processes, macroeconomic news is vital for traders.
For example, when trading the GBP/USD currency pair, news from the United States and the UK is essential since it impacts the GBP/USD exchange rate.
In each country, economic fundamentals are as follows:
Historical data will help you predict the market reaction to the news. Let’s say Canada publishes Q2 GDP in an hour.
The economic calendar shows that the country’s economy grew by 0.5% in the first quarter, and this time it’s expected to grow by 0.7%. When the news is released, you’ll be able to compare the actual value of Canadian GDP with the previous and predicted ones.
If the value has grown more than expected, then CAD is likely to go up, as the country’s economy is actively growing. If the GDP turns out to be, say, 0.6%, then the Canadian currency will be under pressure—the forecast isn’t true.
But if the GDP drops even below its previous value, CAD may go down. This is what Forex news trading is all about.
Politics always impacts the economy, so political factors are of great importance for the market. When the country is stable, investors willingly invest their money in its currency and stocks. When the situation is tense, the national currency and the value of security assets may decrease.
The greatest volatility occurs during elections and referendums when the results are still unknown, but there are loads of rumors. Just think of how the dollar behaved during the presidential race at the end of 2016, or what happened to the pound when the UK held the Brexit referendum.
And yet, political factors are less important than economic ones, as countries rarely experience super important events in their political life.
Force majeure—floods, earthquakes, and revolutions—always come as a great shock to the market. You can’t predict those events; therefore, only highly experienced traders can make money in situations like that. Beginners are advised to close all of their trades and temporarily exit the market.
If the force majeure circumstance is short-lived, then the market will get back on track, while global trends, most likely, won’t change. If the hard situation drags on, then the market will face long-term changes.
We have many strategies, but they have common features: