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How to use Fundamentals to make Money

  • Post #1
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  • First Post: Jan 20, 2009 11:03am Jan 20, 2009 11:03am
Hi Guys,

I haven't been a round here in while but reading through alot of the threads it seems as though the majority of people trade technically. I am not against this in the slightest and am not a person who says this works and that doesn't.

What I would like to do though is offer a different approach to trading Forex.

I trade based on Fundamentals. That is to say that it is my "belief" that every "real" move in the market is driven by an underlying fundamental factor. This could be an Economic Indicator, the news of another Bank Failing or just generally anything that seems to be news worthy.

I do not trade the news!

So what I am going to do in this thread is simply post some daily thoughts on the markets and try to provoke some interesting meaningful discussions from which we can all learn and hopefully in the process you will see a different side to trading Forex.

I hope you all take part!!!!

Micardo



DISCLAIMER:
NOTHING HEREIN SHOULD BE CONSTRUED AS INVESTMENT ADVICE OR SOLICITATIONS TO PURCHASE ANY OF THE PRODUCTS DISCUSSED HEREIN.
At this moment in time identifying a long term perspective is of paramount importance in order to trade successfully, therefore understanding the relevant aspects of the Eurozone and U.S economies is essential. The important aspects are as follows: The inauguration of Barack Obama and his handling of the current crisis, Fundamental Data in economies, the ECB’s decision making capabilities, and China! Now I will attempt to put these issues into context, and explain the link that will affect the Eur/Usd as an investment instrument.

For the past 5 years China has spent 1/7 of its entire economic output buying up foreign debt, especially Treasuries. China’s willingness to lend combined with the U.S willingness to borrow has led to imbalances, and China over taking Japan as the largest overseas holder of U.S treasuries. You may be asking so why is this important? Well here goes… The unsustainable imbalances that required reversing would have needed a gentle devaluation of the USD in order to boost exports and ensure there was more money coming into the country than out. However, ironically the global financial crisis has led to slowed growth, and import demand has fallen more rapidly than export demand as the U.S economy stops spending. Essentially, so far the recession has produced the necessary current account adjustment removing one of the main sources of downward pressure on the greenback (Short term USD Strength).

Barack Obama becomes the official president of the U.S on the 20th and with him comes renewed optimism and hope for the U.S economy. But if he is to live up to the expectations then he has a number of critical decisions to make. The financial stimulus package that he aims to use to kick start the economy has to be financed through the offering of more Treasuries, and the reliance on China to keep on lending. Let us assume the U.S are able to finance their stimulus package, essentially they are creating more debt that will need to be paid and will in the long term exert downward pressure on the USD. Alternatively, however, due to the global economic slowdown being felt all over the world China themselves have to consider their own stimulus package to boost their own economy and may decide to invest at home rather than abroad (Treasuries). If this is the case then the demand for the USD will decline as less purchasers of U.S securities need to buy less USD.

Right now as the stock markets record losses and economic data for both the Eurozone and U.S indicate slowing growth over a sustained period of time; it is fair to say that the short term outlook is gloomy, therefore there will probably be no shortage of takers for the security of U.S government debt. Add this to the ‘Obama Bounce’ and the USD may find some support during the first quarter. Yet as time progresses and the possible lack of demand for Treasuries either through countries keeping money at home, or when the low yields offered by Treasuries become less appealing the USD may get sold. Add the U.S budget deficit getting noticed and I believe the USD will find more negative pressure. Plus when risk appetite returns, the carry trade (funded by USD) will be back on the table and that can only spell further weakness.
Thanks for starting this thread. I trade pure technicals atm, but I wud like to expand my knowledge a little further by looking into fundies. This has been spurred by the tv programme on BBC million dollar traders, as they trade based on news.

The way I see it is fundementals give the main direction of price and valuation of currency, and technicals show how it will reach these targets.

The difficult thing I find is
1) where to get all the information you are talking about here
2) Interpreting this information correctly
3) So many different factors affect others it seems like a birds nest of thoughts

It seems that fundementals are english literature and technical's are mathematics. I never was very good at english. Wud you say its worth looking into fundementals or will i just get confused? I am profitable with using technicals but I want to try and improve my accuracy so see this as the only other way as I have read enough info on technicals.
Also how do you determine what impact fundemental data will have on a price and how can you work out how long it will last? Is it untill you recieve new information?
  • Post #4
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  • Edited 3:57pm Jan 20, 2009 3:19pm | Edited 3:57pm
  •  maxzeus
  • Joined Oct 2008 | Status: Price Action, "TDI" & "HA" | 537 Posts
i only trade technicals but i like to know what makes it move, so i created (copied from several sources) the definitions of fundamentals, for people that are new to Fundies well this PDF will at least give you the basic definitions
Attached File(s)
File Type: pdf Forex Fundamentals Simplified.pdf   105 KB | 1,583 downloads
Don't forget Practice + Patience + Persistence = Profits
  • Post #5
  • Quote
  • Edited 5:44pm Jan 20, 2009 5:32pm | Edited 5:44pm
nice pdf, thanks maxzues. looks well thought out.
Just quickly read through it. Although at first there is a lot to take in i think once applied it wud be easier to digest.
Kudos to the thread starter Micardo, as it is quite some time that we are lookin for a stop in forexfactory for fundamental analysis.
Obviously forexfactory are full of economic data but it is quite difficult to determine why and how it will move the market.

Obviously starting January we see USD is moving in a seesaw direction, while the Euro is also jittery...

Where it will move next will still be a mystery....
Well i just gave my first hand at interpreting fundemental data for GBP today in the GBP/USD thread.
Although I was suprisingly correct on likley outcome of most figures, I still couldnt decide on which way it wud direct the market. Some was gd data some was bad, so how the hell do u interpret it?
Obvoisly my skills in understanding fundies is poor, I just dont get the connections u make to decide on the direction.

I believed the figures that come out for GBP to be only slightly positive and didnt think it wud have much impact on price.
In the run up to news releases prices was dropping rapidly. Then paused bout 30 hour before, then went upwards, then dropped and now continuing upward move. How long does this kind of news affect price?
Thanks for posting your thoughts Micardo. It all seems to make sense - but why doesn't the market agree with you? I've got a couple of theories.

Outlook for US is poor, BUT does this mean that USD should weaken? The value of money can only be measured by what it can buy. If other currencies are devaluing at a greater rate then USD will appear strong.

The USD has one huge factor in it's favour and this has dominated the markets recently - deleveraging of foreign assets and the repatriation of USD has fuelled demand whilst flooding the markets of non-USD currency.

Any thorough analysis of the USD has to include these factors, and in my opinion these factors will continue to dictate the markets for some time.
Thanks for posting this.

I'm trying to get familiar with these reports as I'm aware that are the primary movers of the market. The pdf was quite informative
Quoting fry2010
Thanks for starting this thread. I trade pure technicals atm, but I wud like to expand my knowledge a little further by looking into fundies. This has been spurred by the tv programme on BBC million dollar traders, as they trade based on news.

The way I see it is fundementals give the main direction of price and valuation of currency, and technicals show how it will reach these targets.

The difficult thing I find is
1) where to get all the information you are talking about here
2) Interpreting this information correctly
3) So many different...
Hey,

I will attempt to answer your questions:

1) where to get all the information you are talking about here? There is no one single place where you can get everything you need, it is a combiniation of following the numbers that are released which you can do here at FF, reading articles on Bloomberg, Reurters, CNBC, WSJ and FT. There are also some good newsletters out there which are available for free. The point is that this seems daunting at first but you do get to a point where you can just scan articles and pick out the nuggets of info that apply to you.


2) Interpreting this information correctly? This is a common sense type thing, basically it is usually quite obvious whether the data is positive or negative you just need to put it into context and then use it to determine a long term trend. I will attempt to help you to do that here.


3) So many different factors affect others it seems like a birds nest of thoughts! This is true but as above the more you do it the easier it gets.


And finally I would say that if you are profitable then that is great... knowing the fundamentals is a good thing but don't break what you already have if it works.

This stuff seems complicated at first but once you get the hang of it, it is much easier.
Quoting fry2010
Well i just gave my first hand at interpreting fundemental data for GBP today in the GBP/USD thread.
Although I was suprisingly correct on likley outcome of most figures, I still couldnt decide on which way it wud direct the market. Some was gd data some was bad, so how the hell do u interpret it?
Obvoisly my skills in understanding fundies is poor, I just dont get the connections u make to decide on the direction.

I believed the figures that come out for GBP to be only slightly positive and didnt think it wud have much impact on price.
In the...
I will try to explain this one as well :-).

When I use fundamentals to trade I am not trading the news as such... so one number doesn't mean I will enter or exit. It is more the fact that I look at the trend that the numbers are making, you know like if the last 3 months fo manufacturing data has been going negative then I will determine this is bad for the economy... by the same token if we start to get better months of NFP as in still job losses but not as bad and each month a few less jobs are lost then I would determine that in fact the downturn in the market is coming to a bottom and it moght be a good time to look positively.

You see its not really about the 8am news release letes get in and out in 30 minutes but rather what does this release mean in the grand scheme of things. Things like if inflationary data is coming out above expected then this will make it harder for a Central Bank to cut rates where as if the data is below the benchmark then the Central banks will have more room to be able to cut if inflation isn't an issue.

I also look at the general global news, headlines on bloomberg and that kind of thing to determine what the markets are looking at and then I will trade in the direction of the sentiment in the market.

I hope this makes sense, please let me know if you need more explanation...
Quoting birdt
Thanks for posting your thoughts Micardo. It all seems to make sense - but why doesn't the market agree with you? I've got a couple of theories.

Outlook for US is poor, BUT does this mean that USD should weaken? The value of money can only be measured by what it can buy. If other currencies are devaluing at a greater rate then USD will appear strong.

The USD has one huge factor in it's favour and this has dominated the markets recently - deleveraging of foreign assets and the repatriation of USD has fuelled demand whilst flooding the markets...

Lol I completely agree with you and to an extent the markets did agree :-). I said that the dollar would find support for the newxt few weeks/months (Q1) which is exactly what we are seeing... the only thing I would be wary of when trading is not to get to leveraged up on the long dollar side as I think when the turn around happens it won't be prety for those caught in the wrong direction...

Please note that I believe the long term view for the dollar is really not good and the reasons I have given above but in the short term our trading theme is that of safe haven flows etc
On the day Barack Obama was inaugurated as the 44th president of the United States of America the Stock Markets across the globe recorded significant losses, and promoted risk aversion in the markets. The previous two days has seen the Euro move from 1.3380 to 1.2850, giving away over 500 pips against the greenback. Such moves in the financial markets may have demonstrated the difficult task that lies ahead for Obama, but at the same time confirmed the return of the trading theme from the 4th quarter of 2008. The theme we are talking about is the one where the USD finds support and rallies off the back of negative economic news and tumbling stock markets as investors seek the safe haven status of the USD.

The ZEW came out yesterday and surprised to the upside recording -33.0 instead of the forecast -44.0. This gave the EUR a little boost but really didn’t do it for very long and before we knew it we were downs testing the lows. The German analyst and investor sentiment improvement in January came as the government agreed a second stimulus package. Aggressive easing of monetary policy and the large economic stimulus package raised hopes the economy will stabilise in the second half of 2009. (Reuters). A CNBC analyst also believed that the surprise to the upside was very much to do with the German stimulus package, and warned not to get too happy just yet as we were clearly a long way from positive territory and the median.

Another issue that reflects a gloomy outlook for the Eurozone was the downgrading of Spain from AAA to AA+. The diversity in the performance of the members of the Eurozone makes the handling of monetary policies an extremely difficult task for the ECB. The weaker performers require more aggressive easing from the ECB, whereas the stronger economies not so much.

The other story of the day is the income and earnings announcements. European stocks got absolutely hammered on concern that the slump we are currently experiencing will seriously damage earnings. We are not at the end of this mess and our trading theme is holding strong. UBS support this view as they believe that the possible cautious approach to trading in Q1 may support the dollar (safe haven).

So the plan is to play the volatility that the markets are producing, making the most of the potential short term dollar strength as the safe haven play continues, at the same time positioning ourselves for the EUR recovery which will come.
Interesting thread Micardo

what is your opinion on future interest rate in the euro zone?
Do you think Mr trichet is behind the curve?
"Simplicity is the ultimate sophistication" leonardo da vinci
Hi Mircado

Excellent analysis. Well everyone was expecting the dollar to rally this week primarily because of Obama's swearing in, things are currently so bad he's been hailed as ushering in a new era. He will certainly not be able to perform a miracle and people shouldn't expect that either but its like the old story of a drowning man clutches on to a piece of straw. People desperately want a revival in the economy and are hopeful Obama will with time resurrect the deteriorating economic condition.

I think this is the main factor which has rallied the dollar this week.

I am expecting this effect to wear off in the next few weeks and the dollar to go back to its previous levels.

1)Do you think this is a reasonable expectation?
2)Do you think an event like the swearing in of Obama can overide other fundamental considerations like the NFP, unemployment claims etc in determining the short term outlook of a currency.

thanks
Quoting fugly
Hi Mircado

Excellent analysis. Well everyone was expecting the dollar to rally this week primarily because of Obama's swearing in, things are currently so bad he's been hailed as ushering in a new era. He will certainly not be able to perform a miracle and people shouldn't expect that either but its like the old story of a drowning man clutches on to a piece of straw. People desperately want a revival in the economy and are hopeful Obama will with time resurrect the deteriorating economic condition.

I think this is the main factor which has...
Hey thanks for the comments.

1) I think this is a very reasonable expectation and thoroughly expect this myself although maybe will take a little longer than a few weeks depending on which levels you are talking about?

2) In our current climate I firmly believe that the natural reaction to economic news is completely on its head... as mentioned above when the US gets bad data it currently rallies... as a poster above said this is much to do with delevraging, risk aversion and the flight to safety. Further to this i think that in the short term the outlook of a currency are very much determined by these kinds of events... after all human beings move the markets and human beings watch the news so what ever is flavour of the month will almost certainly have an effect on the currencies.
Quoting vulture
Interesting thread Micardo

what is your opinion on future interest rate in the euro zone?
Do you think Mr trichet is behind the curve?
Hi,

I believe there is definitely some room for a little bit more easing but not to far. Remember Trichet has mentioned about a pain threshold with regards to rates which lies at 1.5%... i think... So in short yes there is more to come I would think but not like the US... I may be proved wrong!

I don't share that sentiment that he is behind the curve simply for the fact that the crisis didn't exactly hit Europe the same time as the US and UK... remember Northern Rock was nearly 18 months ago now...

So the Eurozone were simply acting according to their mandates... Inflation was also something that they needed to consider, the one thing that the ECB are doing is letting events pan out which in the longterm will probably prove to be a better move than flooding the markets with dollars that you don't have and hence incurring debt...
Someone asked about good sources to keep abreast of the fundamentals. I don't think you'll find a better source of informal yet informative commentary on the foreign exchange markets than the daily 'Currency Currents' newsletter from Black Swan Capital. It is free and you can subscribe to receive it in your inbox, just go to http://www.blackswantrading.com/ and stick your email in the box on the bottom left.

Here's todays one:

http://www.blackswantrading.com/file...sccc012109.pdf
  • Post #19
  • Quote
  • Edited 12:05pm Jan 21, 2009 11:48am | Edited 12:05pm
Finally someone can actually explain fundementals and how to properly use them. Thanks a lot Micardo, this information certainly explains a lot of things.
I only wanted to look into fundementals because I hear that it is the main thing that directs the markets, so i want to have an extra edge in the market.
I can well believe it aswell.
Up untill now it has totally elluded me because most information you see is on TA, and very little on the fundemental side.

edit: I do not fully understand fundementals as I previously stated, what i meant was i understand how u shud use it now.

The hard part now I suppose is to be able to gain sufficient knowledge on history and relate it to future information to gauge the value of the currency. I can tell that its not somthing u can learn over night.
When I try to look at fundemental info I cannot seem to make the links, and I bet u have no trouble in doing this because of ur experience with it.
Really appreciate ur time to explain and answer my questions on it, im sure others will as well.
birdt that report was an interesting read certainly.
Though it apears to be quoting what has been said, not figures. How reliable is this source though because is it not from a broker?
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