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What is the difference between fundamental analysis and technical analysis? Technical analysis deals with price charts, paying attention only to price changes and market trends. Fundamental analysis examines external social, political, economic and natural factors.
What is fundamental analysis?
How Central Banks Affect Forex?
Differences between fundamental and technical analysis.
Technical and fundamental analysis are the most commonly used in trading. They help predict price changes. In this lesson, we will take a closer look at fundamental analysis.
What is fundamental analysis?
Fundamental analysis is a set of methods for predicting changes in prices for exchange and over-the-counter assets. This type of analysis is based on external events.
For example, we know that Apple releases a new iPhone every September. This device is the flagship of the company, brings the “lion's” share of the profit.
Any investor is interested in investing money in a company that makes a profit, not a loss. Every time after the presentation of a new iPhone in the consumer market, there is a hype, Apple breaks all sales records.
Knowing this, traders and investors start buying Apple shares back in July and August in order to purchase them at the best price. Against the background of increased interest in Apple shares, the price of this asset is rising, thanks to which traders and investors receive their profits.
Thus, traders and investors, starting from an external factor, make a decision to buy and make a de facto profit. This is fundamental analysis.
How does fundamental analysis work?
Fundamental analysis relies on economic reporting, politicians' speeches, macroeconomic statistics, etc. This data is published as news. You can always see the schedule and forecasts for the news you are interested in in the economic calendar. (insert a link to the site)
Here are some examples of macroeconomic data and their impact on financial markets.
Inflation is the rate at which the overall price level of goods and services rises. Central banks are trying to contain inflation and avoid deflation to keep the economy growing. They do this by raising interest rates. For example, when the Central Bank of the Russian Federation announces an increase in the interest rate, it provokes an increase in the ruble.
NonFarm Payrolls (NFP) - US nonfarm payrolls. This is another extremely important piece of news that is published on the first Friday of every month.
The total number of people employed in the non-agricultural sector is about 80% of the workers, which generate the entire volume of US GDP. The NFP is the most important piece of data included in the employment report, offering the best overview of the economy.
Monthly changes and data adjustments can be quite volatile. If the data on this news comes out better than predicted, then the US dollar is more expensive.
Gross Domestic Product (GDP) is a measure of all goods and services produced in a given period. Central banks and investors are looking at GDP growth to see if the economy is getting stronger. As the economy grows, companies get higher profits, people - more earnings, which can potentially lead to a rise in the stock market and a strengthening of the currency.
Importance and impact of news
To understand how important this or that news is, pay attention to the designation next to it:
★ - extremely weak news, has no effect on the market;
★★ - medium importance of the news, will have little or medium impact on the market
★★★ - very important news, it can cause high activity in the market.
To determine the impact of the news, you need to look at the 3 columns on the right:
Previous value - this column shows data at the time of the last publication;
Forecast - this column publishes the expected value of the published news;
Actual value - at the time of the news release, the actual value of the published news appears here.
Let's look at a specific example:
The US has released a report on crude oil reserves:
- Previous value (previous) - 13.834 million barrels;
- Forecast - 9.271 million barrels;
- Actual value (fact.) - 15.177 million barrels.
It follows from this that, in comparison with the previous indicator - 13.834 M, a decrease in crude oil reserves was expected to 9.271 M, however, in fact, crude oil reserves not only did not decrease, but, on the contrary, increased.
What determines the market reaction to the news?
Any important news is expected by both traders and investors. They are guided by the difference between the actual data and the forecast.
In this case, the situation can develop in 3 ways:
- Market expectations were fully justified: the value of the fact is equal to the forecast. In this case, the activity of the market at the time of publication of the news will be medium and high;
- Market expectations did not come true, that is, the fact is less than the forecast. In this case, the market will react very actively, and we will see the price movement opposite to expectations.
For example, US GDP data is expected to be released. According to the forecast, the data will be positive, everyone is expecting an increase in this indicator and, consequently, the growth of the US dollar. But in fact, the indicators are worse than expected. In this case, the US dollar will not only not rise, but will also fall quite intensively.
- The publication of the news exceeded the expectations of traders: the value of the fact turned out to be higher than the forecast.
Let's go back to the US GDP example. But this time when the data is published, the actual value will be better than the forecast. In this case, the US dollar will grow, and with a higher intensity than in the first case.
Influence of Central Banks on Financial Markets
The most significant factor for any currency is the monetary policy pursued by the central banks. The main instrument of this policy is the interest rate, which determines the amount of interest on loans and deposits for the entire banking sector.
When the interest rate rises, the interest on both loans and deposits increases simultaneously. In this case, keeping money in a currency with a high interest rate is more profitable, since it brings large dividends. When the Central Bank raises the interest rate, it leads to an appreciation of the currency. Accordingly, when the interest rate decreases, the currency becomes cheaper.
The decision on the interest rate is one of the most important news for the market, as it provokes high activity at the time of publication, and also determines the general tendency of the currency to rise or fall.
Force majeure situations
The market is influenced not only by speeches by bank heads, statements by politicians or economic reports. Natural disasters, cataclysms - can also have a fairly serious impact on the market.
As an example, consider the earthquake in Japan, which negatively affected the economy and led to the depreciation of the Japanese yen. Another example: at the moment, the world's largest pandemic since the "Spanish flu" has unfolded. The quarantine measures and the closure of numerous businesses around the world led to a crisis in the global economy and, as a result, the strengthening of gold.
Another point of view
The famous trader George Soros argued: “To predict prices, I only need to read the newspaper and no more,” thereby making us understand the importance of fundamental analysis. However, we recommend using an integrated approach to trading, not limited to one type of analysis.