Fundamental analysis implies a review of the basic (fundamental) indicators of the economy of a country or region, with a focus on the currency. It also includes the study of events with economic or political implications, such as GDP growth, unemployment levels, inflation levels, development of industrial production, etc. Also taken into consideration are events such as force majeure events, natural disasters, and so on. There are about 30 major macroeconomic indicators that affect the performance of exchange rates. Within the gamut of information affecting currencies are news on changes to basic interest rates and press conferences by heads of central banks. The basic interest rate is the percentage rate at which a country’s central bank lends money to commercial banks. The interest rate is the major mechanism used in regulating inflation. The higher the interest rate – the higher the interest by investors for the currency.
Such data is published at scheduled times throughout the year. Those times are disclosed in special economic calendars. Upon disclosure of this information, and depending on its nature, drastic currency leaps on the exchanges may result.
Fundamental Analysis Trading In a Nutshell: Every major news release has a forecasted or consensus figure determined by economists beforehand. If the actual release figure is different from the consensus or forecasted (or expected) figure, the market is surprised and will react to the release immediately. The bigger the surprise, or deviation, will produce bigger reaction. Based on historical data, we can predict that a particular deviation will trigger a minimum amount of pips movement. If a news release consistently moves over 40 pips with a particular deviation, we expect that a similar deviation in the future will likely to cause the market to move 40 pips. Although we have to be flexible in our trading, news trading requires that a specific plan to be followed with specific set of rules to protect our investment. It is particularly important that we only take a trade when our expected deviation is hit, not we get a close enough deviation. For example, if you have promised your teenage son a car on his 18th birthday on the condition that he gets straight A’s in school this semester, and he came home with a couple of B’s, you wouldn’t have to give him a car. We must regard news trading with the same kind of discipline because sometimes almost still means no. To further drive this point, consider that since the forecasted number is an average, many fund managers or banks might be expecting a slightly different number than you and I, and if we take a close enough deviation to trade, we might just be going in the opposite direction against some of these big fund managers.