1. Technical Analysis. The One-Sentence Truth!
2. Forex Fundamental Analysis. All You Need to Know!
2.1. How to Choose a Timeframe? Pro’s Tip!
2.2. How Do Different Factors Affect Currency Market?
2.2.1. Brussels Explosion and Its Impact on Euro Rate
3. Key Fundamental Indicators. Every Trader Must Know!
3.1.Employment/Unemployment or How I Earned With Problems of Canadians!
3.2. Value of Interest Rate!
3.3. Gross Domestic Product. The Best Product!
3.4. Inflation. Don’t Let Money Melt!
4. Connections between Basic Assets. More Tools – More Money!
4.1. Correlation of the AUD/USD Pair. Best Swing!
4.2. Dollar/Gold Correlation. The Regularity of the Currency Market!
4.3. Correlation of USD/Oil. Barrel VS Dollar!
5. Conclusion. The Secret of Success
There are two main methods of forecasting currency market (Forex). They are: technical and forex fundamental analysis. The difference between two of them is in primary principles of the trading approach.
Backers of technical analysis are sure the market has its own kind of memory, being handled by cycles that repeat at specific periods of time, and having defined the dominating cycle correctly, one can forecast the direction of the trend line – whether it will be uptrend or downtrend.
The base of forex fundamental analysis consists of macroeconomical indicators reflecting primary economical indices of different countries. For predicting movements at the market, supporters of this technique have to consider the plenty of economical, political and natural factors affecting economies, and therefore, the state of national currencies.
For better realization, I will give you a shining example illustrating how it was possible to earn with the movement of EUR/USD currency pair, using forex fundamental analysis. In the beginning of 2014, European growth of deflation processes started causing widespread anxiety of analysts. One of the first who were talking about bullish trend ending was the semi-legendary George Soros, having predicted the fall of European currency. But, nevertheless, by the middle of April of 2014, EUR/USD was demonstrating the uptrend, showing the annual maximum in the 1.38 area. European Bank was resisting the fall of inflation for some time, but further, it had to admit the tarry would lead to severe consequences for the whole EU. At the same time, US regulator began preparing markets for the probable toughening of their financial policy. This schism in economical policies of continents led to the domination of dollar in the pair f EUR/USD, which resulted in its fall, in fact – by 30% for the following year.
What conclusions may be made from this example?
Timeframes (or trading periods) are used in order to group currency pair rates.
In contrast to technical analysis which involves short timeframes most (from minute and hourly to daily), forex fundamental analysis is oriented to longer trading periods, such as a week or a month, as it’s quite useless at short intervals, because fundamental data usually come out once a week, month or quarter.
For long years of trading at the currency market, I’ve found a simple regularity: the shorter is the timeframe used in your trading strategy, the high is the intensity of your trading. The increase of emotional and psychological tension (which hinders to make cold considerable decisions and gaining good dividends) is directly proportional to that. In addition, trading at short timeframes is significantly more difficult due to high level of noise, which make traders make mistakes and make wrong forecasts, which leads to making unprofitable orders.
Every day, much statistical data and different news are published. Some of them are secondary, some are specifying, some of them don’t matter at all, and only few of them have the greatest value – they are the base of the fundamental analysis.
The true art is to define main first from the plenty of information, and then to estimate the impact of this information to the market, determine casual connections between affairs and movements during the trading period. All the toughness is in volumes of information to be analyzed – talking only about fundamental indicators of a single developed country – they are about 50, and each of them has casual connections, some of which conflict with each other, some are reflexive, other don’t even affect the long-term trend. Also, there is always the probability of occasional and unpredictable events (earthquakes, floods, abrupt political measures, such as Crimea annexation), which can’t be taken into consideration.
The recent act of terrorism in Belgium (March 22, 2016) proves my words.
On Tuesday, March 22, 2016, at about 8 AM, two explosions took place at the same time in the Brussels airport. More than 10 people were wounded. As Reuters reports, this act of terrorism has provoked the re-orientation of most investors to safer assets, which led to the fall of euro. Also, it’s reported about fall of European stock indices. Bonds and gold, in contrast, got the increase of interest.
It’s impossible to forecast such affairs, but it will be so to ignore them. All that has resulted in the fact that the number of traders using forex fundamental analysis in their trading strategies doesn’t exceed 20-30% of the overall number.
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Employment rate is considered one of the most significant indicators of any state’s economy system health. In the US, the report of the employment rate is published in the first week of the month following the accounting. It includes the report of unemployment for the accounting period and information about salary funds. Traders engaging forex fundamental analysis, permanently watch the coming out of that data, which make the market move in 80% cases. This indicator also affects adjacent, less important factors, such as consumers’ mood and population confidence. As about 60-70% of economical activity is consumer activity, when unemployment rate rises, consumer opportunities of purchasing expensive facilities, real estate and automobiles (everything that gives great profits to major companies) inevitably fall. Fall of incomes of major companies and rise of unemployment rate always has its impact on economical health of any country, and, consequently, on the price of national currency.
A great example illustrating the connection between national currency and employment rate can be in the fall of Canadian dollar on June 11, 2014. USD/CAD pair reflected at once with the fall of Canadian currency toward US dollar, when data of employment rate in Canada was published, being different from forecasted by about 1.5 times.
Another important indicator is interest rate. There is the direct connection between market movements and interest rate. When it falls, so does the national currency and investment flow. The rise of interest rate causes additional investment flow and stimulates higher demand for national currency.
Gross domestic product (GDP) reflects the overall cost of all market goods and services, produced for some period of time. Growth of GDP primarily affects strengthening of the national currency and assets of major companies. It often occurs that due to the fact that some indicators, which the final value of GDP is formed in, are known in advance, analysts are close to each other in forecasts of GDP. And mistakes in preliminary calculations can cause changes in the trend direction.
The world knows two main inflation indicators, each of which is significant for a trader using forex fundamental analysis in their work. One of them is the Consumer Price Index (CPI). It measures the average level of retail prices for goods and services, and also estimates consumers’ cost of living. The second important indicator is Producer Price Index (PPI). It reflects the change of prices for raw materials and resources. Most traders use this indicator for monitoring prices for oil, natural gas and other natural resources. In view of the fact that oil is the considerable part of economy of most countries, barrel price is the object of precise attention. Oil price fluctuation can cause movements in other economical sectors, and also provoke either weakening of the national currency or its strengthening.
All Central Banks of the world consider controlling inflation rate as a priority. Fall of this indicator is a harbinger for stagnation of the economical system. Rise of inflation inevitably leads to rise of interest rate, and its rise tells analysts of “bubbles” in different sectors of economy. The optimal way is to hold this indicator at the fixed level.
There is the range of secondary indicators, which sometimes can attract attention. They are: national debt, national expenditures and tax revenue, investors’ and consumers’ activity, the balance of payments, the yield on government bonds. I must also mention that each country economy has its own specifics, and so, impact of the same indicator on different currency tools can notably vary.
It often occurs that the trading strategy using only one tool, is inefficient. With the growth of trader’s proficiency, here comes the need to engage new trading tools in the strategy. The safe way of choosing new tools is to select those which are related to your basic asset. Correlation rate will help you to estimate the level of connection between assets.
Estimating the rate of correlation, you should take two analyzed tools (assets):
The main goal is to determine whether the change of the independent tool price will lead to movement of the dependent and how strong this movement will be.
Correlation rate changes its value in the range from -1 to +1.
+1 – direct correlation;
-1 – inverse correlation;
0 – no correlation between tools.
Let’s look into several example of correlation between basic assets.
What do we have here? Each currency pair has its own correlation rate with AUD/USD pair put in the cell over against. If the rate is positive, then movements of currency pair rates are correlated; if negative – movements are opposite. For instance, if EUR/USD pair goes up, then there is 97% chance that AUD/USD pair will do the same. It’s important to realize that correlation rate is not the constant value and influenced by external factors making it change.
Another strong relationship is established between gold and US dollar and AUD. USA is one of the major gold producers of our time. In theory, with the rise of gold price, comes the strengthening of US dollar. But the practice is another thing. Profits of gold (produced in the US) exports is not that significant and makes a small contribution to the growth of economical indices of the state. Due to that, demand for American currency doesn’t rise. And there is the opposite situation with Australian dollar. Australia is on the 3rd place in the world rating of volumes of exported goods, which makes the bulk of GDP, i.e. there is the direct correlation: the more is the volume of gold exported by Australia, the higher is the level of its GDP and, consequently, national currency strengthens. From that, we can make a logical conclusion that with the growth of XAU/USD, AUD/USD pair must also show positive dynamics.
Correlation between oil and US dollar showed its best in the second half of 2014. US dollar growth toward other currencies provoked severe fall of oil prices. Correlation is greatly noticed at the following charts:
Charts show that price for the hydrocarbon raw material was moving in the opposite direction from the rate of USD. The reason for this is that oil price formation depends on USD rate: with the strengthening of US currency, oil price rises – it partially reduces demand, and, consequently, the price of the black gold.
To sum up our brief digression to financial analytics, I would like to say that a trader engaging forex fundamental analysis at least at the average level of skills, can demonstrate real success in trading. Remember that the main thing in trading is the permanent aspiration to improve – don’t stay still but analyze the market, look for correlations. Learn to ignore market noise (seocndary, insignificant information), be patient and remember: most successful traders are not named this way due to their extraordinary brain skills or luck, but only to the proper realization of the principles of fundamental indicators’s behavior and ability to determine their impact on the currency market. Only the system of these two parts will become a fair trend and desirable dividends for you!
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