10 April, AtoZForex, London – Having covered the technical part of how to trade Forex, after many requests the time has now come for the second part of the story. In contrary to technical analysis, where most of the data is in one window, fundamental data is vast and is not easily accessible to everyone.
We have numbers that can be manipulated, adjusted and interpreted in a number of ways. Some of the news don’t even become priced in as a part of the foreign exchange. You often hear that stock prices moved based on some reports or events, and most traders just follow the media and have little idea of how the fundamentals are affecting the price movement.
How to trade Forex fundamentals
It is therefore fundamental to understand, filter the key events and data in order to be understand how to trade Forex fundamentals and volatility created as a result. Around the great financial crisis, investors were looking for price stability and inflation was a major issue. Thus, consumer price index (CPI) and producer price index (PPI) readings were the main focus. Now, the importance has shifted on economic growth, so gross domestic product (GDP) and sentiment figures are key.
GDP is considered to be the broadest measure of a country's economy, and it represents the total market value of all goods and services produced in a country during a given year.
In addition, other figures to consider are weekly and monthly economic data such as US Non-Farm Payrolls, Employment figures, Retail Sales, and of course central bank speeches and policy decisions. This is talking about the economy as a whole.
However, analysing a specific currency fundamentally you should look at what are the key performance indicators (KPIs) used by that country’s central bank to evaluate the successes of the local economy. In the context of the Fed, the central banks looks at the unemployment and inflation. Should both KPIs be met, we could expect the Fed to tighten the policy resulting in an initial USD appreciation but lose the momentum afterwards as the economy starts to slow down.
Interpreting fundamental data
Knowing what to look for when you trade Forex fundamentals is crucial, but interpreting them is equally important.
What does it mean?
To start off, note every definition of the mentioned fundamental data. This will help you to know exactly what are you looking at and determine the strength of a possible impact on the market.
Also, determine the type of a country’s economy. If it’s an exporter, how sensitive is the central bank about the strength of the local currency?
Note it down
Before you begin your trading week, note down the most important news and data of the week as a part of your personal trading plan along with what will the event mean should it come as a surprise.
Bear in mind that the market is moved on expectations and the consensus of the data is priced in weeks before the reading is published, while central bank policy decisions – months.
Do your homework
Like you do technical analysis, fundamental analysis also requires time and skill. Be on the top of the latest news. In addition, try to find an access to the Bloomberg Platform, which could sometime be found at the local libraries or universities. Making your analysis, see how the country is performing based on the overall economic outlook as well as central bank’s KPIs.
What is the trend of a specific data? How will the outside factors influence it? And most importantly, what conclusions could be made about the effect on the economy and upcoming central bank decisions?
To trade Forex fundamentals and technical separately is impossible. Fundamental and technical analysis are the two sides of the same story. To leave you with a final remark: Enter fundamentally and exit technically.
Do you think I missed something? Let me know in the comments section below.