The Forex Market is a macro market driven by micro events. Colossal amounts of economic data flows through markets every single week. Large traders must digest this data as quickly as possible to make bets on directional moves in the Forex Market. Imagine having billions of dollars of investor capital to manage and you hear speculation on a Central Bank ready to make a move..What move could that be? You’ll find out shortly..
You want to be a trader in financial markets? Cool, a lot of people ! What actionable steps will you take to be a professional trader. This is designed to help you be a more knowledgeable trader and understand how to trade fundamental analysis.
- What is Fundamental Analysis
- Major Currency Drivers
- Align Yourself With The Moves.
What Is Fundamental Analysis?
I’ll tell you what fundamentals are not.. News trading!
Releases on the economic calendar are micro events. Some are more important than others, which we will get into soon. Macro/fundamental trading is understanding the big picture.
In his book, Pragmatic Capitalism, Cullen Roche states “For instance, if you want to understand how tides change on Earth, you have to understand that Earth is a micro planet in a macro system.” Isn’t that a brilliant explanation!?
Intrinsic value is an important term in finance and as traders you must understand it to make educated trading decisions. Intrinsic value can be thought of as the perception/gauge of what an asset is worth. It's value!
The only way to understand value is to understand what drives the Forex market. This is how you gain an edge. After all, it’s foolish to assume the global median of exchanges($,yen, euro, pound) can be understood by drawing lines on a chart.
If you want to learn the actionable way to trade Forex, Fundamentals are the way.
Major Currency Drivers
There are drivers in the Forex market that are more important than others. Some of the important drivers:
- Quantitative Easing & Fiscal Stimulus
- Capital Flows
- Interest Rates
- Political/Geo-political risk
Every Central Bank is worried about controlling inflation. What is inflation?
Inflation is a rise in the general level of prices for a basket of goods & services in economies. Countries with high inflation tend to have weaker currencies and lackluster economic growth. If any at all.
The goal is to retain a healthy level of inflation in an economy. Central Banks use different tools to control inflation levels. This could be through making borrowing money cheaper or expensive through interest rates. Interest rates are a major currency driver.
Higher rates can drive yield seeking investors to that currency, and vice versa. This causes a decrease or increase in the demand for a particular currency.
The slightest trump tweet can also cause the market to move aggressively!
An understanding of these drivers will assist you in getting an overall bias of how an economy is performing. The more you understand an economy, the better investment & trading decisions you’ll make
It can be a bit overwhelming with the immense amount of information daily. Focusing on the strongest issue in the current state of the market is ideal.
For example, when the United Kingdom was dealing with Brexit (British exit from the EU) that's what you were looking at all 2016-2019! Market participants were only focusing on Brexit related data. That was the synergy in the market due to the process it took to get each step passed.
We are still currently dealing with Brexit, but the market's attention has now turned to the corona virus! Everything encompassing the markets before(Brexit) is now encompassed by Covid-19 as it has rippled through every economy globally.
Besides North Korea, which is an easy guess as to why that is the case..
Once you’ve zeroed in on the strongest mover in the market, you can start asking yourself how that mover will be affecting that currency’s economy. If you have a hypothesis that a specific catalyst will negatively affect an economy, you can start aligning yourself accordingly.
Of course, there are many more variables involved. This is a basic start to get your mind in the correct space.
The rest is up to you to figure out!
Forex Fundamental Analysis is the only way to scale into the business. Remember that money manager managing MILLIONS of dollars? He has to stay on top of pressing catalysts in the market in order to rationalize intrinsic value for the currency or asset.
Forex Trading for beginners can be a tough journey, but putting your focus on Fundamentals in Forex will give you a great deal of understanding!