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Fundamental Trade Studies

If you are forex trader, you must learn the basic macroeconomic factors that influence global market. There is a great controversy between traders that use only technical analysis and traders that use only fundamental analysis. For me this is only academic. If there is information out there you should carefully watch it. Do not rely only in technicals or fundamentals. Use both.

When you have a solid technical pattern that is supported by fundamentals then the chance that you are right is imminent. When technicals and fundamentals show in different directions then you should watch out. Do not be trigger happy with your Forex trading. Wait and see. Forex is not for prophets. You use scientific analysis in order to maximize the chance that you correctly recognize what the market has to give you. Analyze thoroughly, have a solid technical pattern, know the fundamental support of your analysis and you have a nice trading decision. Seize your risk tolerance and you will be a winner.

Every nation has it’s central bank which is responsible for the well being of the economy. Central banks watch some economic factors that affect the economy and adjust their economic policy accordingly. These factors are announced regularly and the exact time of the announcement is known in advance. These factors are the fundamental indicators of the economy.

The most important central banks are FED of USA, ECB of European Union, BOJ of Japan and BOE of United Kingdom. There are many fundamental indicators but there are few of them that are called the "market movers".

They are called so because when they are announced they provide to the market the necessary steam to move. That happens because they have a great impact on economy and to traders positions also.

Build up your plan. Know in advance what important fundamental indicators are to be announced the following week. Learn the expected number if it is available and try to forecast what will happen if it comes in better of worse figure. This is difficult for the beginners but after studying it will be easy.

There are many fundamental indicators. US indicators have the greatest impact on market. European Union’s indicators have less impact unless they are much different than expected. Watch out for central banks head officers speaking out and giving clues about inflation and interest rates. Today these are the two drivers of the economy. Words like vigilant or very vigilant about inflation from central bank’s heads have great impact on the currencies.

When the inflation is up central banks try to keep it low by leveraging interest rates.

Always watch out what the market already knows because all these information are reflected to the prices of the market. When fresh important information comes out learn it and position accordingly.

Now I am going to explain some important economic indicators (market shakers or movers) are:

Gross Domestic Product (GDP): The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country’s economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.

Non-farm payrolls: A feature report released on Friday of the first week of each month that indicates the number of new jobs generated by the economy during the previous month and the percentage of workers seeking employment that remain unemployed. This is a heavy fundamental indicator that caused a lot of moves in forex market.

Industrial Production: Chain-weighted indicator measuring the change in production of the nation’s factories, mines and utilities. Usually associated with capacity utilization, a measure of industrial capacity and how many available resources among factories, utilities and mines are being used. The manufacturing sector accounts for one-quarter of the U.S economy.

Purchasing Managers Index (PMI): The Institute of Supply Management, formerly called the National Association of Purchasing Managers (NAPM), releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders and import orders. It is divided into manufacturing and non-manufacturing sub-indices.

Producer Price Index (PPI): A measure of price changes in the manufacturing sector. PPI measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture and electric utility industries for their output. PPI figures most often used for economic analysis are those for finished goods, intermediate goods and crude goods.

Consumer Price Index (CPI): A measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. CPI reports price changes in more than 200 categories. It also includes various user fees and taxes directly associated with the prices of specific goods and services.

Durable Goods Orders: Rising Durable Goods Orders are normally associated with stronger economic activity and can therefore lead to higher short-term interest rates, which is usually supportive for a currency.

Housing Starts: Measures the number of residential units on which construction is begun each month. It's a leading indicator of economic health because building construction produces a wide-reaching ripple effect. For example, jobs are created for the construction workers, subcontractors and inspectors are hired, and various construction services are purchased by the builders.

Interest rate: Traditionally, if a country raises its interest rates, its currency will strengthen because investors will shift their assets to that country to gain higher returns.

Employment situation: Decreases in the payroll employment are considered as signs of a weak economic activity that could eventually lead to lower interest rates, which has negative impact on the currency.

Trade balance, budget and treasury budget: A country that has a significant Trade Balance deficit will generally have a weak currency as there will be continuous commercial sellings of its currency.

Retail sales: It is the first real indicator of the strength of consumer expenditure.

How do traders use all this?

There are few useful tips that can be followed:

  • Keep an economic calendar on hand. Watch for the events when data are due to be released
  • Know what indicator is gaining the most of attention at any given time as it becomes a catalyst for future price moves. For example, when the U.S. dollar is weak traders will watch closely the inflation indicator.
  • When the difference between the expectations and real results occur, watch for corrections in the market price moves.
  • Pay attention to news revisions if any, the situation on the market can change quickly.
  • Analyze the basic support and resistance lines before the announcement, watch the fundamental announcement and enter the market after the announcement is made knowing the way it will move and the extend it will reach.
Another important thing to consider: (Choose genuine Non dealing desk Broker)

Because of the high volume of trades made at the time of important economic announcements some brokers may block or slow down the execution of new trading orders. For traders it means they should enter the trade before the "major action" begins and, what is more important, they must always have their protective stops placed. Being not able to access the trade desk to close your losing position in time is the most frustrating thing traders should always try to avoid.