Forex Trading :

Fundamental analysis

Fundamental analysis, as well as technical analysis, consists of assessing the bullish or bearish potential of an underlying. It is a deterministic approach based on hypothetico-deductive reasoning, it is, in short, the opposite of technical analysis. In this type of reasoning, it is necessary to deduce conclusions from pure hypotheses and not just from actual observations. This directly implies a good mastery of economic concepts as well as important stages of reflection.

As you should know, fundamental analysis is practiced more often by professionals than by individuals. The reason is not that it is long and complicated to learn, the particular speakers generally prefer to turn to the technical analysis which is much simpler to practice.

The two families of fundamental analysis:

Trading Economic News
We can trade news, it is a method quite widespread among individuals as much as professionals. In absolute terms, it's not complicated, just know the impact that some statistics will have on forex prices. At the moment the number appears, we open a position in the right direction and we keep it for a few minutes hoping for a sudden acceleration following the release. This method presents no particular reasoning, only some economic knowledge is enough to trade, for example the US unemployment figures will fall, if they are positive we will instead buy the dollar and vice versa if they are negative. In short, it is really not difficult, just select a few recurring statistics (unemployment, CPI, policy rates, ...) and to trade the pairs corresponding to their appearances.

Obviously it is not a miracle method either, on the one hand it is necessary to be patient, then it is necessary that the figures impact sufficiently the courses to touch its takeprofit. Moreover, in phases where the volatility is too high, the execution of the orders is not optimal and it is often necessary to undergo slipping. However, by remaining rigorous and serious in its method, this approach is often paid for. The main disadvantage is to be necessarily present at the time of publication, generally the biggest announcements are made in the beginning of the afternoon and therefore it is difficult for the people who are at work or in the course (for the students ).

Basically, "trader news" is linked to fundamental analysis only by a thorough knowledge of the economic indicators being monitored. We shall now see how the fundamental analysis really resides.

Trader on the economic climate
Trading by practicing fundamental analysis means accepting to trade on important time scales. Indeed, when fundamental analysis is analyzed on feelings of the economic climate, these are usually positions of several weeks / months. It would be difficult in a single course to give you all the necessary keys to understand economic theories nevertheless, we will study some economic variables making it possible to judge the effectiveness of a monetary zone.

Examples of Forex Economic News

Interest rates
Again we will not go for details. Key interest rates are primarily tools for central banks to manage inflation in monetary zones (but not deflation). Indeed, excessive inflation can be offset by high interest rates.

Why is that ?
This is not complicated, an increase in the key rate will be passed on to the financial institutions by an increase in the rate of credit and savings. The rise in the savings rate will encourage households to open savings accounts or take out financial investments. They therefore give up their immediate consumption for a greater future consumption. The direct consequence is the immediate slowdown in consumption and thus in demand, and a decline in demand in the face of a stable supply implies a fall in prices and therefore disinflation.

We will now see the relationship between the interest rate and the exchange rate. Here the approach is completely different from that used previously. Let us take an example to understand the logic: If the ECB chooses to raise its key rate, then the interest rate differentials of the Euro against other currencies will be more favorable, therefore investors will be induced to buy l 'Euro / (other) in the case of a positive differential. This action directly produces an increase in the demand for euros and therefore an appreciation of this currency.

It should be noted that the rise in an interest rate implies an appreciation of the currency and vice versa.

The trade balance:
The trade balance is the difference between a country's exports and imports, so if a country exports more than it imports it will have a positive trade balance, it will be called surplus, It exports then it will have a deficit balance.

Invoices for transactions between countries are in the currency of the exporting country, therefore the importer will have to buy the foreign currency and sell its own currency simultaneously. The reaction of the exchange rate is immediately understood.

Let's take an example: Consider a French company exporting to another company located in the USA, then the importing company (USA) will have to buy Euros and sell Dollars simultaneously to settle the bill. In this case there will be an increase in the demand in Euros and an increase in the supply in Dollars consequently an appreciation of the Euro and a depreciation of the Dollar and therefore an increasing EUR / USD exchange rate.

Inflation, as we said earlier, is the relative increase in prices from one year to the next. The reference indicator for calculating inflation is the CPI (Consumer Price Index). To calculate inflation, it is sufficient to observe the relative change in the CPI from the previous year to the current year.

Without entering into complex explanations, theorists consider that it is possible to predict the evolution of exchange rates by comparing a basket of goods and services from one country to another. The idea of ​​this theory is based on the fact that exchange rates are fixed relative to the relative prices of goods between two countries. What is important is that consumer prices are offset by a reversal of exchange rates, for example if inflation increases in France, then the Euro will tend to depreciate. This relationship is mostly long-term rather than short-term.

Conclusion on fundamental analysis:

We have finished with this course of initiation to fundamental analysis, we have introduced some relations linking economic magnitudes to exchange rates. It is important to remember that fundamental analysis does not stand in the way of technical analysis, it is largely possible to combine the two types of forex analyzes to best realize its forecasts.