Tutorial Which class is good for Fundamentals
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benkal
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Fundamental News
As we embark upon the last few chapters in our journey into Forex trading, let’s recap. By now you should be confident in analyzing the markets by yourself to identify trading opportunities. You should know your way around a trading platform, how to manage your money and how candlesticks and technical indicators work. You have learnt high probability buy and sell strategies that can be used on any timeframe. For the majority of unsuccessful traders out there, this is as far as it goes. Armed with their technical knowledge, they proceed to attack the markets with vigour. It is only a matter of time until the market bites back, usually resulting in the end of their trading accounts. It’s all well and good learning the technical side of trading, but if you do not learn about fundamental news, you will never be able to truly understand why the market moves. You do not need to be an economist to understand this, as I will prove now. As always, I have only mentioned what you need to know in order to be consistently profitable.
How News Impacts the Forex Market
At the beginning of this book, I mentioned that in the Forex market, people trade economies. Each country has their own set of performance indicators that they use to compare themselves against each other. Examples of this include Gross Domestic Product (GDP), central bank interest rates, unemployment figures, inflation, and so on. You may have read about these in the papers, or seen it on the news. What you may not know is these economic indicators directly affect the currency markets, and are partly the reason why the world has an exchange rate mechanism in the first place. Currencies have perceived values, based on the state of their country. Therefore, they fluctuate in order to reach a state of equilibrium. Imagine a world without any economic news. There would be no expectation of a country’s currency appreciating or depreciating in value. There would be nothing to compare it against. All exchange rates would be fixed, making the Forex market stagnant. There would be little opportunity for anyone to profit from it.
Where to Monitor News Releases Forex Factory (www.forexfactory.com) is a great free resource that you can use to keep an eye on the global economic calendar. Avoid trading around the release dates and times of certain high impact news releases (which are mentioned below). The market is extremely volatile around these times and can be unpredictable.
High-Impact News Releases
There are set times and days of the month where high-impact news releases come out, for each country. Depending on the outcome of these releases, the market is known to fluctuate wildly. It is recommended to stay out of the market during these times, as spreads widen and stop losses are hit.
To save you some time, I have listed the high impact news releases that you should be aware of at all times.
Gross Domestic Product (GDP) - the overall health of an economy, simmered down to a single number. Interest Rate - the base rate that the country’s central bank sets. Otherwise known as “Cash Rate”, “Repo Rate”.
Consumer Price Index (CPI) – The percentage change of the cost of goods and services. Otherwise known as the “inflation number”.
Producer Price Index (PPI) – The percentage change of the cost to produce the goods and services.
Retail Sales – The percentage change in the amount of consumer spending in shops.
Purchasing Manufacturers Index (PMI) – A barometer of the level of manufacturing activity in the economy. Above 50 indicates industry expansion, below 50 indicates contraction.
Employment Change - the change in number of employed people during the previous month, excluding the farming industry.
The USD version of this is called the Non-Farm Employment Change, and is widely regarded as the most highly anticipated news release of the month. US employment is vital for the global economy, and since most currency pairs contain USD in them, you have to be aware of this piece of news. Usually it comes out on the first Friday of the month. My advice is to stay out of the market on this day, unless you are an expert.
Buy on Rumor, Sell on News (and vice versa)
Prior to a high-impact news release coming out, there will be an expected result in the economic calendar. This forecast is the average result taken from a survey by financial analysts in the industry. As this data is available to us a week or so before the actual release, you will find that the institutional traders tend buy or sell the currency for a few days, in the run-up to it. This is referred to as “pricing-in to the market”. A good thing to do is to take a look at the calendar on a Sunday, to see which releases are coming up for the week. During the week, if you see trade setups appear, think of the news releases that could affect your trade. If you include this as part of the thought process, it will reduce the risk of a losing trade greatly.
The Layman’s Guide to Understanding Economies
Here is a quick and easy way to understand the effects that news releases have on trades. This should save you hours of reading boring books on the subject, and help you predict the long-term movements of a currency pair, in addition to your technical analysis.
High Retail Sales -> High GDP -> High Inflation -> Currency appreciates.
Low Retail Sales -> Low GDP -> Low Inflation -> Currency depreciates.
High Interest Rate -> Higher Inflation -> Currency appreciates.
Low Interest Rate -> Lower Inflation -> Currency depreciates.
High PPI-> High CPI -> High Inflation -> High Interest Rate.
Low PPI-> Low CPI -> Low Inflation -> Low Interest Rate.
Low Retail Sales -> Low GDP -> Low Inflation -> Currency depreciates.
High Retail Sales -> High GDP -> High Inflation -> Currency appreciates.
High PMI -> High GDP -> Currency appreciates.
Low PMI -> Low GDP -> Currency depreciates.
High Employment Change -> High GDP -> Currency appreciates.
Low Employment Change -> Low GDP -> Currency depreciates.
Summary
In this chapter we talked about the importance of fundamental news. As well as mastering the technical side of trading, it is important to appreciate the underlying reasons for why the market moves. The fact is that all long-term trends are governed by fundamental news. By now, you should have a grasp of the following concepts: How news impacts the Forex market Where to monitor news releases and the economic calendar The key high-impact news that you should watch out for while trading How to connect news releases together to predict future long-term moves The concept of pricing-in to the market, and buy on rumour / sell on news
As we embark upon the last few chapters in our journey into Forex trading, let’s recap. By now you should be confident in analyzing the markets by yourself to identify trading opportunities. You should know your way around a trading platform, how to manage your money and how candlesticks and technical indicators work. You have learnt high probability buy and sell strategies that can be used on any timeframe. For the majority of unsuccessful traders out there, this is as far as it goes. Armed with their technical knowledge, they proceed to attack the markets with vigour. It is only a matter of time until the market bites back, usually resulting in the end of their trading accounts. It’s all well and good learning the technical side of trading, but if you do not learn about fundamental news, you will never be able to truly understand why the market moves. You do not need to be an economist to understand this, as I will prove now. As always, I have only mentioned what you need to know in order to be consistently profitable.
How News Impacts the Forex Market
At the beginning of this book, I mentioned that in the Forex market, people trade economies. Each country has their own set of performance indicators that they use to compare themselves against each other. Examples of this include Gross Domestic Product (GDP), central bank interest rates, unemployment figures, inflation, and so on. You may have read about these in the papers, or seen it on the news. What you may not know is these economic indicators directly affect the currency markets, and are partly the reason why the world has an exchange rate mechanism in the first place. Currencies have perceived values, based on the state of their country. Therefore, they fluctuate in order to reach a state of equilibrium. Imagine a world without any economic news. There would be no expectation of a country’s currency appreciating or depreciating in value. There would be nothing to compare it against. All exchange rates would be fixed, making the Forex market stagnant. There would be little opportunity for anyone to profit from it.
Where to Monitor News Releases Forex Factory (www.forexfactory.com) is a great free resource that you can use to keep an eye on the global economic calendar. Avoid trading around the release dates and times of certain high impact news releases (which are mentioned below). The market is extremely volatile around these times and can be unpredictable.
High-Impact News Releases
There are set times and days of the month where high-impact news releases come out, for each country. Depending on the outcome of these releases, the market is known to fluctuate wildly. It is recommended to stay out of the market during these times, as spreads widen and stop losses are hit.
To save you some time, I have listed the high impact news releases that you should be aware of at all times.
Gross Domestic Product (GDP) - the overall health of an economy, simmered down to a single number. Interest Rate - the base rate that the country’s central bank sets. Otherwise known as “Cash Rate”, “Repo Rate”.
Consumer Price Index (CPI) – The percentage change of the cost of goods and services. Otherwise known as the “inflation number”.
Producer Price Index (PPI) – The percentage change of the cost to produce the goods and services.
Retail Sales – The percentage change in the amount of consumer spending in shops.
Purchasing Manufacturers Index (PMI) – A barometer of the level of manufacturing activity in the economy. Above 50 indicates industry expansion, below 50 indicates contraction.
Employment Change - the change in number of employed people during the previous month, excluding the farming industry.
The USD version of this is called the Non-Farm Employment Change, and is widely regarded as the most highly anticipated news release of the month. US employment is vital for the global economy, and since most currency pairs contain USD in them, you have to be aware of this piece of news. Usually it comes out on the first Friday of the month. My advice is to stay out of the market on this day, unless you are an expert.
Buy on Rumor, Sell on News (and vice versa)
Prior to a high-impact news release coming out, there will be an expected result in the economic calendar. This forecast is the average result taken from a survey by financial analysts in the industry. As this data is available to us a week or so before the actual release, you will find that the institutional traders tend buy or sell the currency for a few days, in the run-up to it. This is referred to as “pricing-in to the market”. A good thing to do is to take a look at the calendar on a Sunday, to see which releases are coming up for the week. During the week, if you see trade setups appear, think of the news releases that could affect your trade. If you include this as part of the thought process, it will reduce the risk of a losing trade greatly.
The Layman’s Guide to Understanding Economies
Here is a quick and easy way to understand the effects that news releases have on trades. This should save you hours of reading boring books on the subject, and help you predict the long-term movements of a currency pair, in addition to your technical analysis.
High Retail Sales -> High GDP -> High Inflation -> Currency appreciates.
Low Retail Sales -> Low GDP -> Low Inflation -> Currency depreciates.
High Interest Rate -> Higher Inflation -> Currency appreciates.
Low Interest Rate -> Lower Inflation -> Currency depreciates.
High PPI-> High CPI -> High Inflation -> High Interest Rate.
Low PPI-> Low CPI -> Low Inflation -> Low Interest Rate.
Low Retail Sales -> Low GDP -> Low Inflation -> Currency depreciates.
High Retail Sales -> High GDP -> High Inflation -> Currency appreciates.
High PMI -> High GDP -> Currency appreciates.
Low PMI -> Low GDP -> Currency depreciates.
High Employment Change -> High GDP -> Currency appreciates.
Low Employment Change -> Low GDP -> Currency depreciates.
Summary
In this chapter we talked about the importance of fundamental news. As well as mastering the technical side of trading, it is important to appreciate the underlying reasons for why the market moves. The fact is that all long-term trends are governed by fundamental news. By now, you should have a grasp of the following concepts: How news impacts the Forex market Where to monitor news releases and the economic calendar The key high-impact news that you should watch out for while trading How to connect news releases together to predict future long-term moves The concept of pricing-in to the market, and buy on rumour / sell on news
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