Discover how fundamental analysis can help you plan your entries and identify market opportunities
Fundamental analysis can provide insights into the events that move the financial markets on a daily basis. The forex market is so liquid that even the massive demand from traders and large orders placed by major banks traders can’t affect the prices easily. However, if there is an event that shifts the market sentiment towards a specific direction then we will likely see a surge or decline in the exchange rate between two currencies.
Therefore, those who plan ahead and take these events into account when deciding which currency pairs they will include in their trading session as well as when to make their entries into the market, will be much better equipped to take advantage of these price fluctuations.
Economic indicators that have a pronounced impact on the market and generate substantial volatility in some instruments are closely watched by traders because of the opportunities this volatility creates.
Time and again we have tried to emphasize the importance of market volatility and how volatile markets offer higher profit potential for traders. The caveat, however, is that volatility also carries risk and the rapid rate movements, price gaps and lack of liquidity can be quite less than ideal if you haven’t prepared yourself beforehand in order to manage said risks.
How does fundamental analysis work?
All financial assets are vulnerable to the forces of supply and demand. When there is increased interest in an asset, or a currency, the buyers will dominate the market, which will eventually lead to an increase in prices as well.
On the other hand, when the majority of traders of a currency pair rush to open sell positions, they can drive the exchange rates lower. In forex trading, a buyers’ market is referred to as bullish and a seller’s market is known as bearish. When the market sentiment is bullish, it means that there is an uptrend and the exchange rate is going up, while in a bearish market, the sellers dominate, and the prices sink lower.
Fundamental analysis is a macroeconomic view of the market that takes into consideration all the possible factors that can affect a country’s economy and subsequently, how its national currency is perceived on the world stage. A stable and well-performing currency is more likely to enjoy investments from foreign capital than a currency that isn’t perceived as strong enough to provide good returns in the future.
Which events should you look out for?
There are three main categories of events that can influence financial markets. Economic announcements, geopolitical events, and natural phenomena. Natural phenomena such as floods, epidemics, and earthquakes are usually impossible to predict but can have a pronounced impact on the currency markets as they can disrupt transportation, agriculture, and the labor force in general.
On the other hand, however, financial announcements and reports are more predictable and are usually tracked using an economic calendar. Economic calendars compile all the major upcoming releases, speeches and reports and classify them based on their usual impact on the market.
If a report or announcement is considered to be a high impact, then you can expect increased volatility leading up to its release.
Also included in the economic calendar is the previous period’s results, if applicable, and the consensus for the upcoming event. This is highly important due to the fact that if there is a marked difference between the anticipated number and the actual results, we can expect that the market will react aggressively – depending on the outcome.
Geopolitical events like elections, political turmoil and trade wars can highly influence the direction of the currency exchange rate as is evident by the recent Brexit developments and the trade war between the US and China which had a negative effect on all currency pairs that included the above mentioned currencies.
At the end of the day, forex traders who can anticipate and make accurate predictions on how the market will react to these events can position themselves to profit from the large price movements offered by the increased volatility they generate in the market.
If you are interested in learning more about market analysis methodologies and how you can take advantage of these opportunities presented by high impact economic events, open a CM Trading account today.
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