Basics of Fundamental Analysis

Fundamental analysis is all about using the forex news calendar to make guide your trades in the forex market. These news releases are simply important data on the certain sectors of the economy of nations which are strategically important in the forex market. The countries in question are the major currency countries plus other countries like China, the Scandinavian countries and a few other countries which are of relevance in this regard.  

This data covers key economic sectors such as manufacturing, employment, retail sales, interest rates, trade balances, Gross Domestic Product (GDP), consumer sentiment and inflation.

It is not only economic data which are released on the forex news calendar. Other events of political relevance are also captured. For instance, the presentation of the inflation report in England to the British Parliament is a market moving event for the British Pound. Other data releases that affect commodity markets are sometimes captured in the forex news calendar. 

Basics of Fundamental Analysis

So what is the big deal about the news releases on a forex news calendar? Fundamental analysis, which is the basis of news trading, is all about market sentiment, bias or perception. When the numbers are released, traders have to make a quick decision about what they portend for the economy of the affected country, the investment climate and the currency of that country. A negative perception will lead institutional traders to sell a currency and cause its value to dip. A positive perception will cause these traders to buy a currency, driving up its value.

There is also a question of how long a sentiment will hold in the market. Some news releases are followed by sharp moves, which do not last and the market returns to status quo. This is because after the initial market sentiment, more reasoning goes into interpreting the figures and when the perception changes, the markets will change as well.

Some sentiments may just come out muted. This is because the news release numbers were either not as good or as bad as they appear to be.

The News Trade

So how does a trader perform fundamental analysis? This starts by understanding the data on the forex news calendar. Such data are as follows:

• Country of origin
• Date and time of news release in Eastern US Time.
• Consensus/expected number
• Previous number
• Actual number (usually blank until after news release)
• Revisions (if any)
• Market Impact meter: This classifies the news release into one of low impact, moderate impact or high impact. These are colour-coded: green (low impact), yellow (moderate impact) or red (heavy impact).

 

The key to measuring response is the deviation of the actual figures from the expected figure. The greater the deviation, the greater will be the market response in terms of number of pips that the currency pair will move in either direction.

Generally speaking,

• If actual is better than consensus, the currency will go up.
• If actual is worse than consensus, the currency will drop.

 

Notice that the terms “higher than” or “lower than” are not used, because there are times that a lower actual figure than the consensus is good for a currency and vice versa.

Sequence of News Trades

If a high impact news release hits the market with a wide deviation, there may be an initial spike, which is as a result of the actions of institutional traders. They get the news before the rest of the market through specialized software, and use algorithmic software to initiate these trades.

When the spike is on, retail traders try to get in on the spike. Most times, they will be filled in at less than ideal prices. After the initial spike, the institutional traders start to take profits, causing prices to retreat. When prices have retreated to levels where these traders feel that there is an opportunity to make money once again, they re-enter and push prices once more to a peak. After 30 minutes to one hour of this type of motion, prices will settle and will either continue a slower move in the news trend, or taper off entirely, depending on the market sentiment.

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This article is a guest blog written by easy-forex