How to make Money Using Forex Fundamental Analysis

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How to make Money Using Forex Fundamental Analysis

The fundamental analysis in Forex intends to predict the valuation and market trends of a currency’s quotation by analyzing the current economic conditions, government policy and social factors in the context of a particular economic structure with cyclical cycles. Fundamental Forex analysts study the economic status of a country through the following macroeconomic indicators:

  • Announcement of interest rates
  • Gross Domestic Product (GDP)
  • Consumer Price Index (Inflation) and Expenditure Indicators
  • Employment Indicators
  • Trade and Consumer Confidence Indicator
  • Excessive or Deficit Trade Balance
  • Governmental Fiscal and Monetary Policy

 

We do not intend to explain here the definition of the previous indicators, because as we shall see below our approach to markets will be exclusively through technical analysis.

However, the fundamental idea of the fundamental analysis is that if a country has a healthy economy and growing its currency, it must strengthen itself or be valued. We all understand that if an economy is strong it attracts investment and generates new business. These investments to be carried out lead to a greater demand for the currency of that country, which causes the equation of supply and demand of currency to be modified, and in this case to value the currency in question.

With regard to macroeconomic indicators, and in practical terms for the conduct of your trading, it is important that you take note of the following:

 

  • Every first Friday of each month US employment indicators are presented. You will surely hear from traders and analysts of the ‘NFP’ or Non-Farm Emplyoment report. This monthly report always produces a high volatility in the market and it is my advice to be out of it at that moment, unless you have a strategy designed for this purpose.
  • Central bank interest rate announcements are also a factor to take into account and often cause volatility in markets, especially when the announcement of the rate value is different from what analysts have estimated.
  • GDP (Gross Domestic Product) represents the total market value of all goods and services produced in a country over a given period of time. At the end of each quarter, GDP figures from the previous quarter are released and it will be worth noting whether the evolution was positive or negative (especially in the USA, Europe, England, Japan and Australia). Values ​​very different from what was expected can also have a significant impact on the market.
  • Although the analysis I do in the markets is 99% technical, I do not fail to pay attention to the points mentioned above, advising all who analyze the market by technical means to adopt the same methodology.
HOW TO ANALYZE THE MARKET? TECHNICAL ANALYSIS OR FUNDAMENTAL ANALYSIS?

Simply put, the question to ask yourself is as follows:

  1. A) I prefer to look at the movement of the price in the market and use this information to predict future movements in the market?
  2. B) Or do I prefer to give importance to economic news and decide based on them?

If you prefer the first hypothesis will analyze the market using the Technical Analysis, if you prefer the second will analyze it using the Fundamental Analysis.

From my point of view is the technical analysis that best serves the interests of a trader. If we all know that the Forex market is strongly driven by news of the change in the interest rate or by the presentation of GDP results in a particular country, the truth is that in the globalized world where we live and where news is given minute by minute there are many Variables that may affect the market. From a local war conflict, to a natural catastrophe, to a terrorist attack, or to the release of constant economic data in every part of the globe, theoretically any of these occurrences can lead the market to move.

As I have already mentioned, traders who resort to technical analysis, where I personally include myself, believe that all this news is already reflected in the price movement that the graphs show us, and that it does not make sense the complicated task of keeping up with the news every minute To negotiate in the market.

Traders who do their market analysis exclusively through fundamental analysis argue that the movements that prices have gone through in the past are irrelevant and do not justify predicting future prices and should not be considered to help us in this prediction.

Traders who work with technical analysis challenge this decision and argue with facts. Let’s look at the following chart of the Forex market and that represents the USD / CAD pair:

 

From the analysis of this graph we identify through the red horizontal line positioned below a zone that supports the price in February and then in May. It is legitimate to say that the value reached in February, and then rose, could help us to foresee that a few months later the price could return substantially to the same point, which actually occurred in May. Just as it is legitimate to say that in a few months the price can again reach the upper red horizontal line, reaching a point that we call resistance, that is, a point where the price is likely to be difficult to overcome.

It is therefore at least very debatable whether or not it is false that past prices are irrelevant and do not justify our forecasting future prices. Any one of us who studies the price movements in the graphs will easily come to the conclusion that there are levels of support and resistance that are clearly significant and that can predict with good probabilities of correct future price movements. And if, on the other hand, as fundamental traders argue, technical analysis is irrelevant, how can there be traders who operate on the basis of price movements and who are proven to be successful?

Trading in the news-based market is the same as playing roulette at the casino, as we can not get a chance in terms of the odds for our trade to work out. Obviously there are times when the market reacts exactly as expected when news comes out, but there are other moments that react precisely to the contrary, which makes it impossible to delineate a strategy to enter the market based on news releases. Let us give an example: the news is announced that the European Central Bank has cut its benchmark interest rate to 0.5%. By knowing the news at the time, and now the price of money is cheaper, you will expect the Euro to devalue. Possibly what will happen is that the market reacts in reverse and the euro will appreciate. Because? Because this news was long awaited and what should happen now, (the price goes down) happened at the time the rumor came out in the press. If the ECB cut the rate to unexpected values ​​and exceeded market expectations, it might move in the direction of the news, so it was “discounted” and the market went in a direction contrary to the news. Do not forget that the market operates based on future expectations and for this reason is often said this famous phrase: “buy the rumor and sell the news”.

In conclusion and not removing relevance to the fundamental analysis, my advice is that you never carry out your operations in the market based on news. Follow the price movement through the charts that already incorporate all the relevant facts and complement that analysis with the main news (only as confirmation), but never decide based on them.

 

Source : http://www.richforextraders.com

 

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