Is there such a forex tool
How to Do Forex Fundamental Analysis [+ Tips]
Learn which parameters influence forex fundamental analysis and how to analyze individual currencies.
Did you know that the forex market is the highest volume market in the world?
The daily trading volume is over $ 5.2 trillion. Liquidity is important to forex traders. For many trading approaches, however, the volatility or momentum is even more important.
In order to find out what is really moving the Forex market and when to expect movement in the individual FX pairs, we have to devote ourselves to fundamental analysis.
Many traders and investors only know fundamental analysis in stock trading. Key figures such as equity and debt ratio play an important role here. But what about forex trading?
Different rules apply here, as you will see in a moment.
This post will also show you how important the fundamental consideration is in forex day trading.
Many traders fail because they only indulge in chart technique and try to generate constant profits in FX trading with algorithms or two indicators. I can reveal that much in advance - you will lose!
At the end of the article you will understand why Forex fundamental analysis is so important and you will also get step-by-step instructions for daily implementation.
You have to read this post carefully. Many cannot do that and only skim over individual passages. That is already a good indicator of successful failure in trading.
It is of course easier and less work to follow a trading robot or to incorporate indicators for signaling purposes. But it's definitely not worth it!
Take the time to really understand the general context of the market before you even fire a (pointless) trade.
So if you are ready to rethink your previous behavior as a trader and trust the professional approach of investment banks and hedge funds, then read on now.
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How do large hedge funds and investment banks act?
If you look at the big players in the financial industry, you see almost everyone doing fundamental analysis.
The institutional traders use professional news terminals such as MNI, Bloomberg, Reuters. This provides you with market-relevant information in a matter of seconds. The costs amount to several thousand euros per month and dealer. Would they spend the money if it wasn't worth it?
If a trader made a trade there on the grounds that ".. now long because the Bollinger Bands are contracting ..", he would soon be out of his job.
I have two examples of FX trades from individual investment banks:
"We prefer to buy SEK against USD as EUR / USD may have further upside thanks to the Eurozone’s strong macro pulse and an improving political outlook in Germany. For the same reason we also roll our USD / CHF longs into a long EUR / CHF position. " Source: Fxstreet.com
We believe that the market is pricing in a full extension of OPEC cuts on 30 November, but we do not expect it to make a final decision until 2018. This is a downside risk, as crude oil has been supported recently in part by expectations of a renewal ... In addition, Canada's GDP is likely to show a slower pace of activity in Q3, weighing on the CAD. We recommend going long USDCAD (spot ref: 1.2696), targeting 1.2890 with a stoploss of 1.26 (above the 100-day moving average for a reward-to-risk ratio of 2: 1.
With both trades you can see that the reason for the trade is always a fundamental driver. These fundamental parameters are responsible for whether a forex pair goes up or down.
How exactly this works and which ones they are, let's take a look now.
Forex Fundamental Analysis: What Is Really Moving The Price?
As with all other asset classes, prices are determined by supply and demand.
But whether buyers or sellers have a better negotiating position is determined by certain fundamental components that determine whether the trend in a currency pair is long or short.
The main price driver in a currency is ...
... the domestic central or central bank!
Central banks are responsible for the monetary policy of the respective country or currency area. Some of them have powerful tools that ensure the well-being of the national economy. The most powerful instrument of a central bank is the key interest rate.
The central bank sets the rate of interest around ten times a year. Whether the key interest rate is high or low depends on the country's economic development.
The level of interest determines the attractiveness of investing or borrowing in the respective country for (foreign) investors.
If there is an interest rate of 3% in the USA and an interest rate of 1% in the EU, then an EU investor will invest his money in the USA. To do this, he has to sell EUR and buy USD on the foreign exchange market. The EURUSD is falling.
I have a supplementary post for you here on the role of central banks.
In addition to the interest rates, there is also another driver for forex rates:
If we remember election nights like Trump's victory or Brexit (GBP lost 20% against USD in a few hours), then everyone should be clear about what can happen to the currencies.
Another example: In 2016 you could make very good profits with shorts on the Turkish Lira. Almost every new comment from Erdogan caused a further devaluation of the Turkish lira.
Markets hate uncertainty and such events provide the ideal platform for this.
Now you are right to ask yourself why there are movements in a forex pair even in "calm" times. After all, there is no “Brexit” or interest rate decision every day.
I understand that, but these events create multi-day or multi-week trends in the overall timeframe.
Of course, new rates are created every second, because currency trading is not only operated for central banks. Foreign exchange is used around the clock for international trade.
Every company that imports goods from abroad has to exchange the local currency via the currency market in order to be able to pay for the goods. This means that the market is dominated by a group of participants who (like us) do not intend to speculate. The market is still the same.
We have no control over these orders, but they are part of the business on a daily basis. A large order can therefore cause a move in the forex market in quiet times, which three seconds later points again in the other direction.
If you are only trading according to chart technique here and have not done your fundamental analysis, you are likely to get carried away with a trade that is barely logically justified.
Perform forex fundamental analysis
We now know that there are two main drivers of movement in a currency - central banks and politics.
As in equity trading, we want to use fundamental data to determine whether a currency is likely to rise or fall in the near future.
For example, if we take Google's fundamentals, we see very strong fundamentals based on equity, cash position, market dominance, etc. and therefore no reason to short the stock.
If, on the other hand, we look at the forex market, we also have to determine the fundamentals for each currency individually, but based on (monetary) political criteria.
The following questions will help you conduct a forex fundamental analysis:
1. What is the key interest rate in the country of the currency concerned?
2. How does the key interest rate look in relation to other G10 countries?
3. What rate hikes is the central bank likely to take?
4. What are the political issues surrounding the currency?
5. What about the economic strength?
If you can answer these questions for the respective currency, then you have a good picture of the fundamental situation.
Important: The fundamental situation describes the larger, larger picture of the currency. It doesn't mean that positive fundamentals can't lead to a multi-day crash after all. Nevertheless, in the long run, the fundamental parameters will determine the trend of the currency.
So you should think twice about whether you really want to short a fundamentally strong currency for days and weeks, or rather wait for a long entry at the end of a correction.
Just like investment banks, when I trade forex pairs, I make sure to trade a strong currency for a weak currency. This does not mean the technical, but the fundamental constitution.
This step alone has ensured that I am trading with far more confidence in my trading process than ever before.
The human brain needs reasons and explanations for the movements in the markets. With fundamental analysis, we give our think tank the feed it needs.
Forex Fundamental Analysis: These tools and websites will help you
In order to be able to determine the fundamentals on a daily basis, you can use certain services.
Paid tools such as the professional newsfeed from Ransquawk / Newsquawk simplify things, of course, but are not absolutely necessary to start with.
Update: If you want to use Newsquawk's professional newsfeed for free, you can simply open a live account at XTB and get access to this feed, completely free of charge!
It is enough if you try to determine the fundamental position of a currency on a daily basis using publicly available resources.
On the classic Bloomberg website you get market-relevant information on politics, central banks and individual assets such as currencies, stocks, commodities, etc.
The opponent of Bloomberg also provides you with a lot of information from politics and business on its website. Select here according to market-relevant content such as headlines on central banks, political tensions and currencies. The site is also available in German, but the FX News is only available on the English language website.
On Fxstreet you will also find fundamental data as well as technical chart analyzes of the forex market. You should first pay attention to the fundamental analysis in order to find your currency pair "strong vs. weak" and later consult the chart technique for trade entries and exits. The site is also available in German.
At investing.com you will find a good economic calendar that shows you which dates and events are pending and important for the market. This also tells you when to expect volatility in the respective currency.
With this tool you can search for specific information about a currency or another term. For example, enter “USD” or “ECB”. You will also find other sources than those mentioned so far.
With this post I have sensitized you to the important forex fundamental analysis. You now know which parameters cause a currency to rise or fall. We laid the foundations today.
Work with the sources mentioned over the next few days and get a feel for market relationships and price movements.
If you want to know how you can trade a tried and tested new trading strategy with sentiment, then be sure to check out our new trading webinar!
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