forex trading fundamentals: How to Trade Fundamentals With Currency Crosses

forex trading fundamentals: How to Trade Fundamentals With Currency Crosses

fundamental factors

That’s not the case for authoritarian or semi-authoritarian countries such as China, Russia, or Turkey. They tend to manipulate the data to make a better impression to suit their agenda on the domestic and international fronts. Forex fundamental Analysis can be very complex and time consuming.

Because all major players are in a hurry to fix their previous moves! For this exact reason, if we look at market activity, high-interest rates will cause many players on the one hand to save more, and on the other hand, to reduce borrowings . Because of currency crosses, you now have the opportunity to match the currency of the best-performing economy against that of the weakest economy without having to deal with the U.S. dollar. If strong economic data comes out of Australia, you might want to look at buying the AUD. Determine significant support and resistance levels with the help of pivot points. Find the approximate amount of currency units to buy or sell so you can control your maximum risk per position.

It is truly an academic exercise, but a general understanding of its principles in a given situation will help point you to where you may have your greatest potential for gain. 2014 gave us two prime examples of how this process can work to your benefit. First, the UK economy seemed to be recovering more quickly than the U.S. at the start. The belief was that austerity measures were working, and the consensus was that the U.K would raise interest rates ahead of other nations. As the frontrunner from an FA perspective, the Pound soon appreciated markedly versus its rivals.


Major events can be reports on employment or central banks’ announcements concerning the interest rate, for example. Expectations alone might cause tens of pips to move, even up to 100 pips, all prior to the actual event! The reason for this is that many traders and speculators prepare themselves just before the coming event. Upon deciding the phase of the cycle, we will try to determine the dynamics that can enhance productivity and create a period of non-inflationary economic expansion on a global scale.

Drawbacks of fundamental analysis

The upcoming US ISM non-manufacturing PMI for August is expected to come in at 55.1 from 56.7, suggesting that growth is decelerating but remains in modestly positive territory. The forecast is strong enough to keep intact the ‘good news is good news’ paradigm for the US Dollar, but ‘good news is bad news’ for US stocks and gold prices. A basket of goods and products, which is published once a month.

If the interest rate has already moved in a certain direction a few times, it must be balanced back. Fundamental analysis is less efficient for forecasting trends in the short term. This approach explains and teaches what logically “should” happen right now to market prices, a reaction to events. Sometimes a fundamental approach is even more important than a technical one.

balance of payments

– Before every major event, all kinds of professional analyses forecast the results. The majority of them come to a decision and a consensus is created. So, large transactions start just before release, and obviously before the small “fishes” get into the market. The effect of the Consensus is that if the results match expectations, we are not really going to see a high volume of transactions because they have been already made. In order to become a fundamental trading expert, you must see the whole picture. Use your experience to recognize a range of connected events, and don’t just analyze a single piece of data.

Examine technological innovations, political environment, emerging market fundamentals

In other words, increasing the interest rate will cause inflation to slow down and even stop, which in turn leads to a drop in prices while strengthening the currency! Meaning, it moderates the pace at which the economy grows. It measures the market’s standard of living and its health. If it rises , this indicates a healthy economy which will eventually lead to an interest rate increase. A GDP report can be lower than the previous report but still remain positive. Negative GDP, especially if it shows negative numbers more than once consecutively, should turn on a big red light concerning the stability of its currency.

currency’s strength

It is recommended to follow the announcements he makes to the media. Remember, Fed policy has the biggest influence in the world on the Forex market. One fundamental announcement might shatter all previous technical analysis you have built and followed. Traders who only work with short-term technical tools often miss great longer-term investment opportunities . Fundamentals discuss the reasons for present trends and not the trends themselves.

We will study the balance sheets of nations in terms of current and capital account situation. Is the nation’s external position maintained by bank deposits and asset sales , or by long term developments such as foreign direct investment or reserve accumulation? We discussed these matters in previous texts, and the reader can examine them for a better understanding of balance of payments dynamics.

Compare money supply expansion and credit standards with the previous period

We must first determine the phase of the economic cycle on a global scale. According to a Bloomberg News survey, the Canadian economy added +15K jobs in August after losing -30.6K jobs in July. Job gains may not be sufficient to keep up with workers entering the labor market, however, as the unemployment rate is anticipated to rise to 5% from 4.9%. Coming days after the September BOC rate decision, the data may have a muted impact on the Canadian Dollar. Nevertheless, a weak Canada jobs report could prove troublesome for the Canadian Dollar, given the BOC’s stance of softer forward guidance relative to other major central banks. Other key players worth mentioning are the largest commercial banks .

Be informed about the economic indicators that are capturing most of the market’s attention at any given time. Such indicators are catalysts for the largest price and volume movements. For example, when the U.S. dollar is weak, inflation is often one of the most-watched indicators. The retail-sales report measures the total receipts of all retail stores in a given country.

Knowledge of these will allow us to react quickly to market shocks, and help us reduce our losses when they inevitably occur eventually. In light of their past behavior we will examine the policy biases of major central banks, such as the Bank of Japan, the Federal Reserve, and the ECB. Our study will take into account the policy biases and legal mandates of these institutions, along with their independence. In some cases, expectations alone can affect major price movements. There are events that create a buzz, thereby causing major transactions and heavy traffic in pips as a result.

From George Soros to Warren Buffet, some of the world’s most famous traders have admitted that they owe their fortunes to the fundamental analysis they have made over the years. Keep an economic calendar on hand that lists the indicators and when they are due to be released. Also, keep an eye on the future; often markets will move in anticipation of a certain indicator or report due to be released at a later time. Other major indicators include the purchasing managers index , producer price index , durable goods report, employment cost index and housing starts.

In both cases, a general knowledge of forex Fundamental Analysis would have guided the trader to currency pairs that offered the highest potential for gain. Your goal is to understand how the market is changing, and fundamental information drives those changes. Spend your time wisely, however, in order to reserve as much time as you can for trading.

There are several other significant economic events that have a big impact on the Forex market. Imagine that all major economic journals and news sites including CNN, CNBC, and Bloomberg report that a certain well-known, major corporation is in a real danger of bankruptcy. You can imagine what is going to happen to its share price over the following days. In the second step, we move from the generalized studies of the first step to a more specific discussion of the developed world economies.