Fundamental Analysis - Part I - the Basics
- There are 3 Analytical Processes used to determine a trade;
- Technical - Or using Charts and Probability.
- Price Action - Or looking at volume and Supply and Demand to see where price is headed.
- Fundamental - Looking at a Companies/Countries Economic indicators to determine the valuation of a company or a countries currency.
- Most "retailers" are told from the beginning not to trade 30 minutes around news events as there is heightened volatility and large swings. For me the reason is that Most people Don't have access to the Fastest, most accurate news services like a Bloomberg terminal.
- However in recent years, And more importantly since 2008, the markets are in the public domain more than ever.
- Because of this there is greater interest in economic releases and there are FREE services out there that can provide news within 30 seconds of the actual release.
- Now you might say that 30 seconds is too late to trade on the actual number - whether it be GDP numbers or NFP print - but the Risk Appetite changes for the rest of the day unless anything is there to change it and so the move is likely to continue.
For Example: Here is AUDUSD from Friday the 3rd February, where at 1:30 (GMT) we had the Highly Anticipated NFP numbers released.
As you can see AUD rose very quickly from about 1.07 to 1.0750 in a matter of seconds. In this situation the 243K print for NFP which would seemingly be "good" for the US in fact pushed the USD down significantly against most Majors.
But just because you missed the initial 50 pips doesn't mean you can't enter a Long Trade after the Price retraces on Profit taking, to then trade with the Optimism the rest of the day has. You could easily go on to have made 70 or so pips.
In this part of the series of articles on Fundamental Analysis We will also explore ways of trading from News releases.
- To continue, there are many profitable ways of trading using News releases to aid your trading.
- Economic releases are normally Scheduled months in advance and everyone has their calendar marked for that particular day.
- This gives ANY trader the access to News that is very important to the markets.
- Another thing to remember is the Inter-Relationship of EVERY market, For example:
In the last Few weeks Apple Inc. ($AAPL) released their earnings report. It blew away estimates and the Stock rose nearly 10%. Now, I know you are thinking how does this affect the Forex markets.
Well indirectly it doesn't but, Through $AAPL rising, it pushed up the NASDAQ Composite which is a RISK asset. this in turn correlated with other RISK assets like EUR and AUD and it did in fact move EURUSD up around 30 pips.
- Hopefully from this example you can realize that nearly every piece of news is important in one way or another to everyone, even if it is something that psychologically changes a persons view on the market to a more Bearish outlook.
- This also is intended for you to broaden your opinion and not just focus in on a single security or data point but to take the entire Global Economy in to consideration.
There are a few methods that you can employ when trading around news releases.
- You can set Buy stops and Sell stops around price so that if you have a Volatile news release you can profit from whether or not it goes up or down, this works normally if there has been a period of consolidation before the news release and that price has coiled into a tight range.
For example EURUSD is trading at 1.3000 5 minutes before the US GDP figures are relesed. You have no idea whether or not they will be good but you set a buy stop 15 pips above Market price and a Sell Stop 15 Pips Below. Hopefully regardless of if its bad or not you will be entered into the market and EUR will rally or fall with you.
With this method you have to be careful with false breakouts and be quick on the trigger to close the position out if you need to .
- Secondly if you are a Scalper you can, if you act fast enough, trade with the trend and get caught in the wave and ride it into profit for a few small pips.
This can be done by seeing the intital upward pulse and buying the down ticks that occur and if you are fast enough get 5-10 pips in seconds.
- Next, You could Hedge and already open Position to Protect it from a spike and if it goes against you older position your new holding will cancel it out with its profit.
This is a very clever and safe idea which I personally recommend everyone does around news time.
- Lastly, The numbers can paint a picture in your mind of what is to come in the future and you could take a very long term (quarterly) view on the markets and trade accordingly.
More in depth Analysis:
To finish Off,I want to talk about a very interesting Correlation between the US federal reserves balance sheet and the European Central banks and It is clearly very similar to EURUSD exchange rate.
If you believe this and also believe that the ECB is planning a $1Tn Long-term Refinancing operation (LTRO), it would price in a fall of the EURUSD to 1.12. A huge 2000 pips below us now. A huge fall. the LTRO is scheduled for mid March but could happen at any time and you need to be ready to react as it could bring the volatility that was seen in 2008 back.
I hope you have enjoyed reading this article and hope it has helped destroy the preconceptions that arise around trading News and that you consider it more useful in the future.
In the next part I will look in to specific news releases such as GDP, Inflation, Interest rates and NFP , and show the normal effect of different (good or bad) numbers.
I hope you Are able to wait until next week for the next part.
I welcome ANY Questions.